TRUSTS

JOSHUA KRANE Historical Introduction The law studied in this course derives from the Chancery Courts in England. Every English lord had his local court to resolve disputes between tenants. The Royal Court, created and staffed by the King, resolved relatively few disputes. Local courts applied local custom, but the Royal Court applied the COMMON LAW. People would petition the King to resolve their disputes. However, other dispute mechanisms continued to address legal questions, which included Parliament and the Chancery. All litigation in the common law was conducted in the name of the King. A WRIT was an order in the name of the King that ordered the defendant to appear in court. The Chancery issued the writs. Complaints about the legal process itself were channelled to the chancery, since the Royal Court may not recognize some pleas.1 Early Chancery proceedings were inquisitorial and were very informal.2 The Chancellor did not administer a system of law, as he merely responded to a petition based on a failure of the system of law. The orders compelled people to act because of conscience or natural obligations. The Chancellor, often a religious figure, made orders, under threat of imprisonment (SUBPOENA). A party might behave lawfully, but unconscionably. This has survived as a justification today. Equity does not declare rights in rem but acts in personam by enjoining the party to act or to restrain them from acting even if the party has a common law right. The Chancery evolves from a secretariat to a court. Even today, some people can conceive the Chancery as repairing deficiencies of the common law (i.e. enforcement of uses/trusts and the production of documents). In cases of conflict, the Chancery rule
1

For example, if a defendant has paid a debt, but the plaintiff kept the deed, the common law might compel the defendant to pay again, because of the parole evidence rule. 2 The Chancellor questioned the parties under oath.

prevails. This provides a precept of the modern system of civil justice. If we say that Chancery only supplements the common law, then no conflict exists, because of the corrective/ameliorative function. By circa 1600 (until circa 1800), equity became a system of law; however, until 1813, only the Lord Chancellor judged cases in equity. By the 1850s, Parliament began to fuse the remedial powers of the two courts. By 1875, the Judicature Acts created a single court the High Court of Justice to administer both systems. The history of equity leaves us with several legacies: Equity is based on conscience whereby the court will correct errors in law so as to ease the conscience of the parties, Equity is discretionary (such as specific performance of contracts), Equity supplements but it does not contradict the common law remains a predominant maxim. This false, however, because equitable interventions arise when errors occur in common law. People still debate the relationship between common law and equity (whether the Judicature reform is merely a procedural change or a change in the substance of the law3), A trust is defined as an obligation (and the property rights grow out of this obligation). Equitable property rights are always mediated by a trustee, since someone always owes an obligation. For example, the transfer of an equitable interest in land is considered, for the most part, as an assignment of a right not a transfer of land. The Trust A feoffment is a transfer of a legal estate in land. The transferee was the feoffee and the transferor is the feoffor. A USE is a feoffment subject to uses or obligations.4 This allows the transferee to do things unrecognized by the common law:5 Make a will to grant land, Give benefit of land to those unable to hold it, and
3 4

Are claims to remoteness of loss in equity and common law the same? The tenant holds the land (in legal title) for others. 5 The rules of primogeniture prevented a feoffee from granting land to others not in the line of heirs.

Avoid burdens arising on legal transfers (relief and wardship incidents).

Nobody takes on death, because the feoffee holds the land.6 For the time being, the conveyor can enjoy the benefit of the use, as the cestui que use or the beneficiary of the use. What happens if the feoffee to uses does not comply with the feoffor/cestuis demands? The feoffee to uses would hold the deed, which is evidence of legal title. By the 15th century, cestuis could go to the Chancellor to require feoffees to act in accordance with their use obligations. The Chancery not only enforced the promise (claim in personam) but it also recognized the cestuis interest in the land (claim in rem). By 1634, Sambach v. Dalston, the Chancellor recognized that the second use creates a trust. * Even if the feoffee conveys legal title to a third party, then the third party is bound to the uses. This is true for the feoffees heirs and his creditors. The cestui maintains his interest even though he conveyed his property away. The only person who could take the land from the cestui was a bona fide purchaser of the land from the feoffee for value without notice.7 This is why a creditor cannot take, since value is not exchanged at the time of the transfer. The third party cannot keep the property for themselves, because in each of these cases, save the bona fide purchaser, because the conscience of the third party would be affected by displacing the cestui. It would be unconscionable for the third party to interfere with the obligations between the trustee and the beneficiary. From this, we conclude that a third party cannot interfere unless that person has a clear conscience.
6

For example, B (legal title) holds the land for A (equitable title, cestui que use). When A dies, B conveys the land to C. B has a bare use as B would essentially do as A tells him to do. This is a bare trust. WHENEVER SOMEONE HOLDS PROPERTY FOR ANOTHERS BENEFIT, A BARE TRUST EXISTS.
7

A purchaser can apply to the recipient of a gift. That is why the purchaser must pay value. In the modern law, the cestui would have a claim against the feoffee for breach of trust.

Feudalism is long gone as a social structure in England by 1500, because tenants used uses to avoid incidents. The Statute of Uses, 1538, was an attempt of fiscal feudalism to compensate for the avoidance of incidents. The Statute of Uses executed uses, but it did not operate on four occasions (see Common Law Property notes). The Statute of Wills, 1540 allowed a tenant to transfer land via will without the use of uses. We create trusts for a variety of purposes: estate planning, tax planning, financing and investment as well as charitable purposes. Definitions and Classification A TRUST, according to Underhill, is: An equitable obligation in relation to particular property, That binds a person, known as the trustee, To deal with property over which he has control, For the benefit of persons who may enforce that obligation, the beneficiaries. A SETTLOR is the person who creates the trust. A TESTATOR creates a trust by will. There is no settlor if the trust is created by operation of law. A TRUSTEE is the person who holds the legal title of the trust property. A trustee may have certain powers (see below). The trustee holds the powers in a fiduciary capacity. A BENEFICIARY obtains the benefit of the trust property. The same person can be in more than one role. Multiple parties can fulfil the same role. Consider the following example: In trust for A for life, and then to B. B becomes a beneficiary with a vested interest as soon as this is set up, but receives no money until As death. A is the income beneficiary, while B is the capital beneficiary. B is entitled to an account of the property as a beneficiary. A disposition may provide that a real trust may have discretion, which includes the power to encroach on the capital in favour of A or B, and the power to accumulate income into capital in favour of B.

Income actually paid to A ceases to be trust property. The trust ends when the capital is paid to B. We also know that you cannot create a perpetual trust, unless it is to a charity (simply because of the Rule Against Perpetuities). Types of Trusts We can classify trusts in different ways. For example, we can distinguish bare trusts from active trusts, because in a bare trustee will follow the instructions of the settlor or beneficiary, while the active trustee will follow the terms of the trust.8 However, the major classification of trusts are categorized by their mode of creation. 1. A settlor can create an EXPRESS trust deliberately for the benefit of persons or corporations, or for the benefit of purposes to fulfill a particular objective. A charitable trust is an example of a trust for purposes (public trust). The income may be exempt from taxation and the rule against perpetuities. The settlor can determine all of the interests in advance (executed trust) or he can leave the final determinations to the trustee (executory trust). If a settlor does not completely constitute the trust by transferring the trust property to the trustee, the trust is not enforceable. 2. Trusts may also arise BY OPERATION OF LAW. The RESULTING TRUST jumps back to locate a trust. It occurs, for example, when the settlor does not dispose of all of the beneficial fee simple. The settlor becomes the beneficiary, because the equitable interest goes back to the settlor. This solves the problem of the trust having failed.9 We can have intentionally created resulting trusts, to B in trust for C for life. This is a trust resulting in pattern. So where does it belong? Is it express or does it arise by operation of law?
8 9

A bare trust usually requires the trustee to hand over the property. The casebook provides the example of a person who gives money to another in contribution for the acquisition of property. The other holds legal title, but the person may have a beneficial interest in the property. This can be construed as a resulting trust or a constructive trust (see Hussey v. Palmer).

A CONSTRUCTIVE TRUST is an example of a court order to penalize a defendant for unjust enrichment.10 An IMPLIED TRUST is an ambiguous concept. Perhaps all constructive and resulting trusts are merely implied trusts. Also, in some cases, a court might infer facts to show that the actions of a party gave rise to a trust that might not have been express in fact, but implied by (or inferred from) facts. The Statute of Frauds imposes writing requirements for the creation of certain kinds contracts and trusts, especially trusts of land. However, if the law creates a trust, writing is not required. 3. Trusts may also arise BY OPERATION OF STATUTE. For example, s.2 of the Estates Administration Act states that the executor holds the deceaseds property for the beneficial interest of the heirs. A DEEMED or STATUTORY TRUST can impose an obligation upon employers to hold property for future obligations such as vacation pay. Additional Notes: ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________

10

The court will construe the trust from the facts.

POWERS OF ADMINISTRATION A POWER is the authority to manage property that one does not own. Unlike an obligation, a power is an enabling mechanism.11 An APPOINTMENT POWER is the power to select persons (or objects of power) to receive property.

A donee need not exercise his power (facilitative), but a trustee must perform his obligation (obligatory). Failure of a trustee to perform can render him liable for breach of trust. Unlike an appointee, a beneficiary has a proprietary interest in the trust property. The objects of power only have a hope of receiving the property, however, they may complain of the donee attempts to exercise the power incorrectly. If no one is appointed, those who the settlor names in the disposition take in default (by GIFT OVER). These people have a vested interest in the trust property subject to defeasance by appointment.

More discretion as we move from right-to-left. The difference between fiduciary power and discretionary trust is hard to articulate. A fiduciary cannot release a power, because it is inconsistent with its obligation as a fiduciary. Similarly, a trustee is under a fiduciary obligation to the beneficiaries. The holder of a personal power can release the power. In a discretionary trust, there is no need for a gift-over or default, because all of the property must be disposed of by the trustee. In a fiduciary power situation, the fiduciary need not dispose of all of the property to the beneficiaries.
11

For example, the power of attorney is the authority to represent a person under certain circumstances.

Re Lloyd (1938) Ont. Supreme Court Facts: A testatrixs will read: I give my husband power to devise, bequeath, and appoint all my estate among my sisters and niece in his discretion. Issues: Did the provision create a trust with the remainder to the surviving heirs or did it merely create a power of appointment such that intestacy would result? Holding: The provision created a trust. Reasoning: Justice Rose determined that the court must examine the construction of the disposition to make the determination. The will is more complicated than in Re Weekes because the parties are singled out in the will. Rose quotes from Halsburys Laws to state that a court may imply a trust in default of appointment and no gift over is stated, and a clear intention that the donor intended those named to benefit. Turner v. Turner (1984) Chancery Division Facts: A settlor created an inter vivos trust to benefit his wife, children, remoter issue, and their spouses. He appointed his father, sister-in-law and her husband as trustees. They exercised their powers three times upon the instruction of the settlor. Issues: Were the appointments valid? Holding: No. Reasoning: Justice Davies explained that trustees with powers to appoint must consider: 1. Whether they should exercise their powers, 2. The range of the objects of power (who can/should take), 3. Appropriateness of individual appointments. The trustees did not give consideration as to the appointments, because they merely acceded to the settlors will and per Re Hastings-Bass as court may set aside the exercise of a fiduciary power if the trustee did not turn his mind to its exercise. Re Weekes Settlement (1897) Chancery Division Facts: A testatrix died leaving her husband with the power of appointment to dispose of property by will amongst the children. The husband died without exercising the power. There was no gift

over. Issues: Can the children claim as beneficiaries of a trust? Holding: No. Reasoning: The husband chose not to exercise the appointment power. Nothing in the will suggested that the testatrix created a trust for the children. Certainty about Objects of Power of Appointment Re Gulbenkians Settlement Trusts [1970] House of Lords Facts: The settlor attempted to create a trust to benefit Gulbenkian, his wife, children, remoter issue, and he gave the authority to the trustees such that they shall at their absolute discretion direct the income to any person who company/care, with whom Gulbenkian might be employed/residing. The second disposition was a default clause. If they do not give the income away, the clause directs the income to go somewhere else. Issues: Did the disposition create a power? Holding: Yes, but it is akin to fiduciary power. Reasoning: Power Issue The default clause in Gulbenkian is a clue as to whether the disposition created mere powers, or a trust. The default clause is a strong indicator that the donor granted a power. The absence of a default clause is not necessarily indicative that it is a trust, because the donor may not have thought about undisposed income (to be held in resulting trust). A settlor or testator who entrusts a power to his trustees must be relying on them in their fiduciary capacity so they cannot simply push aside the power and refuse to consider whether it ought in their judgment to be exercised. Certainty Issue Even if the words are ambiguous, the trustees/appointors can apply to the Chancery Court for interpretation. The court will consider the following test:

1. It must be clear that the donee can properly perform the power, such that the donee does not face conceptual uncertainty as to whether an individual is a member. 2. The power cannot be capricious/impulsive. For example, if the settlor left money in trust for John Smith and he knew several, or left money to my old friend but he had many, without additional powers, the trustee would be incapable of deciding who gets the property, and therefore the disposition fails for conceptual uncertainty. Even with all of the evidence in the world, we could not determine what the settlor meant by old friend. Additional Notes: Gulbenkian lowered the standard of certainty. This creates a paradox, because a more relaxed test is more likely to lead to a situation where the trustees end up giving income to a person who the settlor may not have wanted to receive income to. However, if the power fails because the test is too strict, then none of the named persons (potential appointees) will receive nothing. This is hardly consonant with the testators intention. The point of setting up the trust this way is because the wideness of the class makes it unattractive for re-sale. ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________

______________________________________________________ ______________________________________________________ ______________________________________________________ Mere Power Trust Power (Discretionary Trust)

The donee has the authority to manage property. It need not exercise the power. If it does exercise it, it must do so in accordance with the terms of the power. Powers can be exercised in a fiduciary capacity. A person who exercises power in a fiduciary capacity cannot release the power unless expressly authorized. Failure to exercise a power does not necessarily lead to liability. The test for certainty of objects of the power is the individual ascertainability test, per Gulbenkian

The trustee has an obligation to manage property. It must perform the obligation.

The exercise of trust obligations is always done in a fiduciary capacity. A trustee cannot release itself from an obligation unless he retires.12 The trustee is in breach of trust if it fails to perform its obligation. The test for beneficiaries of a discretionary trust is the individual ascertainability test, per Gulbenkian. However, the court will also consider whether the class is administratively unworkable.

The presence of a default clause (gift over) in a disposition give an indication that the donor created a power. The donee must determine whether it should exercise the power. If so, the donee, who exercises power in a fiduciary capacity, must survey the possible objects of the power. If the donee exercises power in a non-fiduciary capacity it may be
12

The trustee must survey the possible objects of the power. All the residents of London would probably be invalid, for capriciousness.

A trustee may retire if the other trustees consent to its retirement. They will appoint a new trustee in its place. There is, however, lack of harmony as to the various rules in the different provinces. A trustee can seek a discharge from the court if it wants to retire. It would be hard to imagine the court denying this request. The court, may, however, compel the trustee to pay the fees associated with retirement. Although again, this seems unlikely.

able to wait for appointees to come to it. The donee must determine whether the appointment to an individual is appropriate (Turner). The settlor of an express trust can retain certain powers. One such power is the power of revocation. If the settlor holds the power of revocation, it can defeat the beneficial interests of the appointees. Trustees exercise certain powers. For example, trustees will exercise administrative powers to manage the trust property. The trustees will also exercise dispositive powers, such as the power of appointment, to convey the trust property to the beneficiaries. The power of advancement allows the trustee to encroach on the capital so that a beneficiary can take advantage of an opportunity. The power of encroachment allows the trustee to distribute income to a beneficiary. A trust beneficiary can challenge the trustees exercise, by alleging the donee exceeded its power or that it breached its fiduciary duty. Trustees must exercise their powers in the proper motive, and not to put themselves in conflicts of interest (Fox).

The potential object of a power can challenge the donees exercise, by alleging the donee exceeded its power or that it breached its fiduciary duty, per Fox.

Can still have a power without a gift over. If the donee of the power does not exercise the power, the money reverts to the settlors estate. If the trustee does not exercise the power of appointment in a discretionary trust, the court will make the choice for it (Lloyd).

EXPRESS TRUSTS

There are several requirements to meet for an express trust to be valid: capacity, certainty of intention to create the trust, certainty as to the subject matter, certainty as to the objects, construction of the trust, and other requisite formalities. Capacity Generally, minors, the mentally ill, and bankrupts cannot create trusts subject to certain exceptions. Likewise, they cannot act as trustees. A non-incorporated association, not being a recognized legal person in Ontario, cannot hold property as a trustee. Any legal person can benefit from a trust. In the case of a nonincorporated association, a trustee may hold property for the benefit of the groups individual members. The three certainties are related, because as Re Walker shows, when there is uncertainty as to the subject matter of the trust, or which property is trust property and which property is not, the court may also question whether the settlor intended to create a trust at all or whether a proposed beneficiary is an object of the trust. The three certainties are conceptually different, because of the results if one certainty is uncertain.

If the subject-matter is uncertain, there is no trust, because a trust requires trust property. The property belongs to the donor. If however the intention is uncertain, the result may be that the donee receives the property without obligation; see Johnson v. Farney.

Re Walker (1925) UK Court of Appeal Facts: A testators will read: should any portion of my estate still remain in the hands of my wife at her death un-disposed by her, such remainder shall be divided. Issues: Does the property of the wife at her death belong to her beneficiaries or her late husbands? Holding: Her beneficiaries. No trust was created. Reasoning: Justice Middleton explained that the court could have

adopted one of two choices. 1. Either the transfer creates a life interest and the rest of the husbands property becomes a gift-over to the beneficiaries named in his will, or, 2. The husband transferred the property to his wife and any conditions afterward are void for repugnancy. The court accepted this choice, because the widow had the right to dispose of the property as she chose and therefore the property had been fully alienated to her. Rationale: When a person has power of full disposal or encroachment on property, the court can interpret that to mean exclusive ownership of the property, not subject to control of the previous owner. We can contrast this disposition with the one in Re Shamas, which read: to my wife all will belong to my wife until the last child turns 21. If my wife marries, she should have her share like the children. If not, see that every child gets his share when she dies. This disposition created a trust. The wife has a defeasible life interest on re-marriage. She also has the power of encroachment until the last child turns 21. The children are not merely objects of a power, but are beneficiaries in a discretionary trust. The 3 Certainties: Certainty of Intention If I intend to produce a trust, I should go to a lawyer to produce a trust deed. This may not be the last step, since transfers of real property will have to be registered, and transfers of shares may require corporate approval.13 The problem with intention arises when there is an absence of legal advice (when people write their own wills).

13

Today, trustees seem to have more discretion, because circumstances change. These discretions allow modern trustees to be more flexible, while still being incompliance with the trust: power to change the place of adminsitration of the trust, Power to add beneficiaries, and others.

The creation of a trust is a unilateral act. However, the trustee must agree to be a trustee (however, the common law does not conceptualize the trust in this way). Technical language is not required to create a trust. What is required? Prof. Smith contends that the court must find two important things: The settlor intends to create legal obligations. The property will not belong to the trustee beneficially (the trustee will hold the property for the benefit of another, the trustee will be liable for breach, the trustee must invest, etc.). See Johnson v. Farney. Would the wife in that case be an income beneficiary or a capital beneficiary? Did she have the power to encroach? The property should not be at the free disposal of the transferee-trustee. The trustee has obligations in relation to particular property.

Johnson v. Farney (1913) Ontario Supreme Court Facts: The husbands will read as follows: leave all you are to my people and your people to be divided between them. Issues: Did the husbands will create a trust for both his and her families or was the wife free to dispose of the property to her family (he intended beneficiaries) alone? Holding: No trust was created. The wife could do as she pleased with the property. The wife received the property outright. Reasoning: 1. Either the transfer creates a life interest and the rest of the husbands property becomes a gift-over to the beneficiaries named in his will, or, 2. The husband transferred the property to his wife and any conditions afterward are void for repugnancy. The condition was a wish and not a legal obligation. The court will not reduce an absolute gift to a life interest merely by the inclusion of precatory language. Since the husband sought to advise the wife over her entire property (and not the property that he left her), the court interpreted the intention to mean advice only. The trust only affects the property remaining at the end of her life. The words leave her with such a large interest, but this casts doubt on the intention of the settlor. This shows how the three

certainties are related and reflexive. Rationale: A settlor must be specific as to his intention to create a trust and name the specific property to be held in trust. This case is very similar to Re Walker. Maitland reminds us that a disposition will be effective as intended or not at all. The court likely will not confer upon a party the benefits of property as a beneficiary, when the party intended the disposition to be a gift (see topic below). Certainty of Subject Matter A trust absolutely requires trust property, because the trust is a way of holding property. The residue of an estate is capable of forming the subject matter of a trust, because the residue is ascertainable even if it is yet unascertained. This is partly a rule about property transfer. For example, if I intend to create a trust using a Royal Bank account, but I have 6 and I do not specify which one, the trust fails. Hunter v. Moss (1994) Court of Appeal Facts: The defendant Moss held 50 shares for the benefit of the plaintiff Hunter, but Moss did not actually separate the 50 shares out of the 950 he owned. Issues: Do the 50 shares constitute the subject matter of a trust? Holding: Yes. Reasoning: This case does not deal with a gift, because the defendant did not deliver the share certificates to the plaintiff (nor did he intend to create a gift). Therefore, a trust is the only consideration. We know that a trust of personalty may be created orally so a deed is not necessary. Lord Dillon distinguishes this case from Re London Wine because

this case amounted to a declaration of a trust and not the purchase/appropriation of personalty. The plaintiff never claimed that he had title (nor was there receipt of a title or anything that resembled a title), but that the defendant held the property on trust. Dillon distinguished another case, Mac-Jordan Construction v. Brookmount, in which the court determined that Brookmount did not hold moneys owed to Mac-Jordan in trust, but that Mac-Jordan merely had an equitable charge on the money in a mixed fund (such that Mac-Jordan was going to be treated as an ordinary creditor and not the owner of the money). A chargee cannot insist on specific performance, because of its position as an ordinary creditor. In this case, the company was named, as well as the content of the trust namely, 50 shares. The shares are nearly indistinguishable and there is no difference between share #1 and share #950. Rationale: It must be clear that the trustee holds a separate property in trust for the beneficiary. Re Goldcorp shows that when potential beneficiaries must draw property out of an undifferentiated mass and where individual allotments of property are not ascertained, the property (beneficial title) never passes from the debtor to the potential beneficiaries. If this transfer had occurred in a will, the executor would have transferred 50 shares to Hunter. The question that arises in this case is: which 50 shares are subject to the trust? It is impossible to isolate which property he holds in

trust. If, for example, Moss gave 800 shares to a third party, did he breach the trust? Can we intepret this to mean that Moss held 1/20th of each share on trust? No, because this would have contravened Moss intention. Consider what would happen if Moss gave all of this shares away and of the 50 remaining, he gave them away and squandered the money. Hunter would attempt to claim against the third party because the third party is not a good faith purchaser for value. At the moment the settlor creates the trust, people must know what property is in the trust it must be ascertained or ascertainable. When we know what property comprises the trust, but the quantum to each beneficiary is uncertain, the trust will also fail. Except when: 1. The trustees have a discretionary power to determine the quantum themselves [not a fixed trust], 2. The court may rely on the maxim equity is equality to divide the trust property equally among the beneficiaries, 3. The court may determine for itself who gets what (see Re Golays Will Trust)14 Re Golays Will Trust (1965) Chancery Division Facts: The will directed the testators executors to let the beneficiary receive a reasonable income from his other properties. Issues: Is the term reasonable income uncertain to the void the disposition? Are the beneficial interests uncertain? Holding: No. Reasoning: This case is about the terms of the trust who gets what out of the trust property. We know what the property is, but we do not know how much income will be paid to the beneficiary or back into the capital. Justice Ungoed-Thomas states that whether the trustees determine
14

The authors of the text state that when the quantum to each beneficiary is uncertain, the trust fails for want of certainty of subject-matter. We can consider this uncertainty as an uncertainty as to the objects, because the terms of the disposition of trust property is unclear. A failure of certainty of shares leads to a resulting trust.

what constitutes reasonable income, or the courts do so, the outcome yardstick would be identical. I think Ungoed-Thomas means to say that both the trustees and the courts can use reasonable discretion to make such a determination, and therefore, it should not void the disposition for uncertainty. The court is in the business of making objective assessments of income as to what is reasonable and what is not. Rationale: Where the disposition provides some discretion to the trustees in the form of determining reasonable income the disposition likely will not be void for uncertainty. Golay illustrates the same paradox as in Gulbenkian. The court could have failed the trust so as not to make a mockery of the testators intention. The judge was creative, and turned the matter into a factual question thinking it better to uphold the trust, even if the beneficiary gets an income that is less/more than the settlor had intended. Certainty of Objects Certainty of Terms of the Trust [Powers are also subject to the requirements of certainty of objects] The settlor must tell the trustees to whose benefit they hold the property. If the certainty of objects fails (and the other certainties do not), there will be a resulting trust.15 We know that the trustee took the property as a trustee, and therefore, we know that the trustee cannot benefit. In many cases, there may not be a problem: in trust for A for life and B absolutely. A and B are objects of the trust. The problems arise when the settlor names a class of beneficiaries that is conceptually uncertain my old friends, my nice professors, etc. Evidentiary uncertainty will not cause a trust to fail. The court can give direction if need be.16

15

The trustee will hold the legal title, for the benefit of the settlor/beneficiary.

16

A trustee can go to court to seek direction by way of application. There need not be a conflict. The court retains a supervisory jurisdiction over trusts.

Fixed trusts for equal division in a class trustees need a complete list of trustees to effect the distribution. This uses the class acscertainability test.17 Discretionary trusts for division in a class - in Broadway Cottages, the court will treat a discretionary trust as a fixed trust, and will divide the property equally, based on the maxim equity is equality. This gives rise to the class ascertainability test. The class ascertainability test requires that the trustee be able to determine exactly who is a beneficiary of a trust. Consider, to members of my family equally. Without knowledge of who is a family member, the trustees cannot perform the obligation. A complete list can protect the settlors intention (without the Broadway Cottages argument); however, this may be too strict, because if it fails, no one will take. The individual ascertainability test requires that the trustee be able to determine whether an individual is a beneficiary (or is not a beneficiary). The following case, McPhail v. Doulton, determined that the individual ascertainability test has replaced the class ascertainability test. The case also recognized the similarity between a discretionary trust and power of appointment. The trustee of the discretionary trust must survey potential objects of the trust, rather than wait back to determine who asks for money. If the words are clear, but the class is administratively unworkable, the certainty of objects will fail (i.e. all of the residents of greater London). This would satisfy the conceptual certainty requirement, because residency is a certain concept at the individual level. It would require the trustees to survey the entire class. This is probably acceptable as a power, but not as a discretionary trust, because the obligations on the discretionary trustee are more onerous. In case of powers, the trustees may still have to advertise. McPhail v. Doulton (1971) House of Lords [Baden #1] Facts: Baden settled a trust for the benefit of any officers and employees or ex-officers or ex-employees of the company or to any relatives or dependents in such amounts at such times and on
17

For example: in trust to my three children.

such conditions as they [trustees] see fit. Issues: Are objects of the trust uncertain to void the disposition? Holding: No. Reasoning: The court of appeal applied the test from Inland Revenue Commissioners v. Broadway Cottages, without the benefit of the House of Lords holding in Re Gulbenkians Settlement. Difference between a discretionary trust and power of appointment In both cases, the trustee/donee will be acting in a fiduciary capacity: he is most likely to have been selected as a suitable person to administer the trust from his knowledge and experience, and would consider he has a responsibility to do so according to its purpose. A trustee would surely never require the preparation of a complete list of names he would examine the field, by class and category; might indeed make diligent and careful inquiries, depending on how much money he had to give away. Lord Wilberforce determined that in this disposition, the clause uses mandatory language shall apply to create, along with the power of selection, a trust for the beneficiaries. Wilberforce remitted the clause back to the Chancery Division to determine whether the clause was void for uncertainty. Test for uncertainty In obiter, Wilberforce re-states the rule from Broadway Cottages as he says that a trust cannot be valid unless, if need be, it can be executed by the court, and that the court can only execute it by ordering an equal distribution in which every beneficiary shares. This is paradoxical, because equal division is the last thing that Mr. Baden would have wanted. It would have left many people with little money!

The cases cited in Broadway Cottages (Harding v. Glyn, for example) were put aside as anomalies; however, Wilberforce said that these cases illustrate that equal division does not rest on a principle inherent to the nature of a trust. Quoting from Farwell on Powers, Wilberforce said that the trustee must survey the field at his discretion to determine who deserved the trust property. The trustees have a duty to consider along with a duty to distribute. This is what the settlor would want the trustees to do. Rationale: Wilberforce overturns Broadway Cottages and states that the trust is valid if it can be said with certainty that any given individual is or is not a member of the class adopts the individual ascertainability test. There are problems with this test, however, as identified by the judges of the court of appeal in Baden #2. They are as follows: i. ii. iii. iv. v. How does the court distinguish conceptually certain from uncertain classes of beneficiaries? What happens if some categories are certain, while others are not? Must the beneficiary show that he is included, or not excluded? Can a person apply to be a member? How many people must be ascertained so that the category becomes certain?

Re Badens Deed Trust #2 (1972) Court of Appeal Facts: The case was remitted to the chancery Division to determine whether relatives and dependants were sufficiently certain to enable the court to determine who is/not a beneficiary. Holding: The words are sufficiently certain. Reasoning:

The three judgments agree that the objects are certain, but offer three different judgments. This judgment water down the individual ascertainability test, because we can interpret Wilberforces articulation of the test as the individual ascertainability test. Per Lord Sachs, the instrument must be examined through the eyes of a businessman looking to improve the welfare of his employees. Once the class is determined conceptually, it becomes a question of fact and evidence whether one falls within it or not. Solution #1: A stream of authorities exists to support the proposition that dependants is a viable/certain category. The word relative is also sufficiently certain, because a relative is someone who an employee would introduce as a relative not as a kinsman or a distant relative. Per Lord Megaw, few trusts would stand for certainty if the word dependant was uncertain. Megaw effectively considers the consequences for trust law if dependant is uncertain. The trust is not administratively unworkable (he states a practical reality). The trustees could ascertain many objects of the trust who are relatives and dependants. The trust should not fail, simply because many objects could not be ascertained. This is the class ascertainability test, which was rejected in Wilberforces obiter and in Re Gulbernkians Settlement. For Megaw the category is certain if a substantial number of objects is ascertainable. It is more difficult to prove a negative and therefore, so long as the court can identify a substantial number of people who are in, that will validate the class. Solution #2: Megaw starts from the proposition that the two tests are different. The defendant poses a problem: when Wilberforce says is/is not, this should mean that every person either is or is not in the class. This is the class ascertainability test.

Megaw re-conceives Wilberforces test, because Megaw would use evidence to start to define the class. Otherwise, the distinction between the two tests is not clear, when a trustee must go through every possible person and say that each person is/is not a member. That looks like a class ascertainability test. Per Lord Stamp, it is not enough for the trustees to show that one person can fit the category, to uphold its validity. The trustee must survey the range of objects or possible beneficiaries to carry out the duty. They should not distribute the money to those who are easily/readily identifiable. This seems to be a positive obligation to do something. Solution #3: The trustees must do their best to find beneficiaries that fall within the class. The word dependant refers to a financial dependant. The trustee must be satisfied that the beneficiary satisfies the qualification as financially dependant. Rationale: The strict test for certainty is not the courts position. Rather, the court will consider whether the category is sufficiently certain by determining whether it is possible to identify a sufficient number of members of that category to be beneficiaries. Note: that a test proposed by Lord Denning would find conceptual certainty should the court be able to place one person in the class. In addition, when we talk about powers we do not face the same problems, because the appointor is not compelled to give trust property to the appointees. Constitution of Trusts CONSTITUTION is the conveyance of the legal estate to the trustee with the certainties. The property no longer belongs to the settlor. A trust must have trust property. The trust can be constituted in three ways: the settlor can transfer the trust property to the trustees, a third party can transfer the property to the trustees, the settlor can hold the property in trust as trustee for the beneficiaries. There can

be all of the intention in the world, but with no constitution, there is no trust.18 If a person transfers property to another person that does not mean the person creates a trust. The transferor might be giving a gift, making a sale, or making an assignment. Equity will not perfect an imperfect gift is a related maxim of equity. The settlor often has the intention to make a gift [to transfer property without trust], but the settlor has not met the conditions for gift, namely intention, acceptance, and most importantly, delivery (or a deed, a formal piece of writing, symbolic, constructive, etc.)19. Judges face a tension: do they give effect to a donors intention, via a letter or a promise of property, and the rules of transfer of property via gifts, wills, and trusts. Settlor Holds the Property Until the settlor constitutes the trust, the property still belongs the settlor. It is tempting to try to make a trust out of a failed gift. Transfer to a trustee is like delivery, because the settlor would divest himself of beneficial ownership. This would fictionalize the donors intention. However, the intention to burden oneself with onerous obligations is not the same as the intention to divest oneself of the property, and the courts are suspicious of these arguments. Carson v. Wilson (1961) Supreme Court of Ontario Facts: The deceased executed valid deeds for benefit of certain persons/grantees. He gave the deeds to his solicitor with instructions for delivery after his death. The deceased controlled the assets by collecting rents and there was not delivery of the deeds. The delivery step for deeds occurs when the giver
18

The settlor can put a power of revocation in the trust deed (but there are tax consequences). In Anderson v. Patton, the Alberta Court of Appeal determined that the power of revocation is not inconsistent with a trust, so long as the settlor/trustee declares his intention to hold the money in trust for the beneficiary, and does not attempt to give a gift. 19 This has an evidentiary function (to prove the passing of title). It also fulfills a cautionary function (to require the giver to feel the wrench of delivery).

intends it to take effect. Delivery of deeds includes physical delivery and the intent to deliver. Issues: Who has title to the property? Holding: The deceaseds estate has title and the proposed grantees have nothing. Reasoning: The only way to give property effectively at death is to use a trust or a will. Justice Schroeder explained that the grantees cannot claim the deeds were a gift, because the deceased never delivered the deeds. Nor, were the deeds held in escrow for the grantees.20 Secondly, Schroeder did not find a trust, because the deceased never intended that the solicitor hold the deeds in trust for the grantees, as the deceased ignored his solicitors warning to make such an arrangement. Schroeder applied the rule from Milroy v. Lord to state that a court will not perfect an imperfect gift by using the trust mechanism. The deceased did not declare himself to be trustee. Rationale: The court will not find a trust if the facts do not establish intention to create a trust and when the facts show intention to create a gift instead. Transfer of Property to the Trustees Sometimes, the transfer of shares in a company requires the directors approval to amend the shareholder register. The transferee does not become the shareholder until the company amends the register. During these two steps, we have a gap. This case is an exception to the principle that the court will not perfect imperfect gifts. Re Rose (1952) Court of Appeal - by the settlor Facts: The deceased transferred 10 000 shares in a company to the companys secretary and his wife as trustees for the benefit of his wife, Mrs. Rose (and her some). The transfer forms were delivered in March 1943, but approval and registration on the
20

Holding something in escrow will mean that a third party holds property on a condition subsequent, usually for the future payment of money.

companys books occurred in June 1943.21 The transfer was subject to a duty if it was made within a certain period before the deceaseds death. Issues: Did the transfer take place in March, or in June when the transfer was approved? Holding: March (no duty had to be paid). Reasoning: Per Evershed MR, the settlor used the proper forms to effect the transfer. Mrs. Rose accepted the shares subject to a covenant that she would oblige by the conditions imposed upon her by other shareholders and corporate regulations. Had the deceased just declared himself trustee in March, there would have been no problem. Mrs. Rose argued that the court should imply a trust because Mr. Rose had done everything to transfer the shares away. The Crown argued that dispose of the property in March, because Mrs. Rose did not take the property that day. Evershed rejects this argument, because although the disposition was meant to operate as an immediate transfer of rights, it could not possibly do so, because the company had to approve the transfer. A trust may exist when it is not possible for the transfer to occur right away.22 This decision is compatible with Milroy v. Lord, because the deceased did everything in his power to dispose of the property. After registration in June, the transfer was complete and the gift was perfected. Until registration, the deceased was the trustee of the legal estate, until his wife could possess the property as trustee and receive income as beneficiary. Rationale: During a delay period before a transfer is
21

The time when the transferees become the legal shareholders.

22

This is a similar situation to when a person sells his house, and the seller retains the legal title until payment and closing. The seller holds the legal title in trust for the buyer. Except that unlike in Re Rose, the seller has an obligation to sell the house and that is why we can call this a trust. In Re Rose the deceased had no obligation to give the property to Mrs. Rose and he could not do so if the directors did not approve the transfer. Be careful with tax cases.

approved/registered, if the transferor does everything in his power to divest himself of the property, the court may imply a trust. The giver cannot really change his mind anyway and so it may not be incompatible with Milroy v. Lord. What if the company had refused situation? We have already said that trusts arise out of obligations in respect of the property. There cannot be an express trust, because he did not intend to create a trust. Perhaps this is a constructive trust yet there are no obligations, because he had already intended to give away the property. In addition, if a dividend were to be paid, who would receive it? Perhaps we should read this case down. The following case, Re Ralli, describes accidental constitution. Re Rallis Will Trusts (1964) Chancery Division - by a third party Facts: The testator gave a life estate to his widow, remainder to his two daughters, Irene and Helen. Helens marriage settlement (trust) stated: if Helen becomes possessed of property, she will vest it in trustees. Helen never transferred he share of her fathers estate to the trustees of the marriage settlement. She died in 1956 and the widow died in 1961. The plaintiff, Irenes husband John, is the sole surviving trustee of Helens estate and the testators estate. The plaintiff asked the court to determine where the money goes. Issues: Does Helens interest in the residue of her fathers estate go to Helens estate, or to the beneficiaries of the marriage settlement? Holding: The interest was held in trust for the beneficiaries of the marriage settlement. Reasoning: Trust property can be an interest under another trust. Justice Buckley interpreted clause 8 of the settlement to state that Helen held the interest as a trustee, on trust, for the trustees of the marriage settlement, who held it for the beneficiaries of the marriage settlement (who are Helens nieces and nephews).

Justice Buckley continues his judgment which leads to the same result, but this depends upon the facts of the case. By coincidence, the plaintiff is trustee of both trusts. The plaintiff was not given the property by the settlor, Helen, but he had it by virtue of his role as the testators trustees. Rationale: The beneficiary of one trust can hold property on trust for the benefit of others, even if that property is not vested in possession of the beneficiary.

Declaration of Self as Trustee In this circumstance, no transfer is necessary; however, problems of proof arise. The subsequent case is really about intent to create a trust. The trust property was in the bank account; however, it did not become trust property until the settlor showed the intention to benefit his girlfriend. The settlor does not have to know of the declaration. Remember, however, the intention must be the creation of a trust and not a gift (Milroy v. Lord). Paul v. Constance (1977) Court of Appeal Facts: The deceased received 950 as damages for injuries he sustained. He opened a bank account in his name only and deposited the money. The plaintiff, his girlfriend, was with him. The deceased told the plaintiff that the plaintiff could draw on the account and that the money was as much his as it was hers. When the deceased died, the wife, who had not lived with the

plaintiff for the past nine years took out letters of administration and closed the account. Issues: Did the deceased hold the money in trust for the girlfriend and himself jointly? Holding: Yes. Reasoning: According to Snells Principles of Equity, a plaintiff need not use the word trust to create a trust. The defendant argued that the plaintiff had no evidence that the deceased did anything to create the trust. Lord Scarman rejected the defendants argument that this was an imperfect gift, since the plaintiff never claimed that it was a gift. The deceaseds intention was to create a trust in which both he and the plaintiff were interested. Scarman warns, however, that this is a borderline case, since he cannot indicate the precise moment when the trust was created. The deceased stated, as much his as it was hers on several occasions, which was sufficient to establish intent. Rationale: A settlor can constitute a trust, with himself as trustee, by taking property and saying repeatedly that the property will benefit another party. Additional Notes: ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________

______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ _____________________________________________________

THE TRUSTEE The bulk of the law of trustees applies to intentionally created or express trusts. In cases of implied trusts (trusts created by law), the courts will usually find a trust to hand over the property which is a bare trust. We can abstract the office of trusteeship from the person who performs that office. Once the terms of the trust are set, and the trustee dies or disappears, without the power of revocation, the settlor will be stuck with the new trustee. The trust is an institution that extends over time and the office transcends the individual holder. Appointment, Retirement, and Removal of Trustees The settlor normally appoints trustees by using the trust instrument. The settlor may reserve the power of further appointment by that instrument only. If the trust instrument does not contain such provision, in all common law provinces (save PEI and NB), the trustees may appoint new trustees themselves. The trustees can also replace/substitute a trustee that: dies, remains out of province for a year, wants to be discharged, refuses to act, is unfit, is convicted of an indictable offence, or is bankrupt/insolvent. If there are no surviving or continuing trustees, the personal representative of the last surviving or continuing trustee has the power to administer the trust. Note: The trustees must act jointly and uniformly, unless the trust instrument says otherwise. Section 60 of the Ontario Trustee Act allows trustees to apply to the court for an opinion, but the court will not compel the trustees to act. Re Brockbank (1948) Chancery Division Facts: The testator left the residue of his estate in trust for his widow for life, and on her death to her two children. One of the two trustees wanted to retire, and he and the beneficiaries wanted Lloyds Bank to be appointed as trustee. The defendant refused. Issues: Can the beneficiaries compel a trustee to retire and then select his successor?

Holding: No. Reasoning: The beneficiaries have a choice: they can by mutual agreement choose to end the trust, or they can continue to be beneficiaries of the trust. No doubt that the trustees may choose to exercise their power of appointment in accord with the wishes of the beneficiaries; however, they have a duty to consider the consequences and to act in the best interests of the beneficiaries even if it is against the express wishes of the beneficiaries. The rule in Saunders v. Vautier allows the trustees to collapse the trust, but they cannot dictate the terms. Rationale: The beneficiaries cannot compel a trustee or a representative to appoint a person of their choosing. Note: the executor of an estate is not necessarily a trustee even though it is common practice to call the executor so. The executor owes an obligation to discharge the will, but the recipients of the property of the will do not necessarily have beneficial ownership absolutely, because the executor must liquidate the debts of the deceased before paying out the estate. The courts inherent jurisdiction of appointment is codified in the Trustee Act and similar statutes. Courts can appoint substitute and additional trustees. The appointment is guided by three principles, as articulated by Lord Turner in Re Tempest: 1. The court must consider the wishes of the settlor. It ought to examine the trust instrument to attempt to appreciate that intention. 2. The court must strive not to appoint a trustee that some beneficiaries would oppose. 3. The court should appoint a trustee that will better the trust. In Re Moorhouse (1946), the plaintiff, Mary, and a trust company are co-trustees. Mary asked to resign as a trustee, but to have her solicitor replace her. The Ontario Supreme Court did not permit Mary to appoint her solicitor in her place (per sub-section 3(1) of the Trustee Act). The other trustee must consent.

No upper limit exists as to how many trustees may hold the property. However, in cases where the only one trustee held the property originally, two must replace him (or a trust corporation, see per para. 6c). In order to retire without going to court to ask for removal, the other trustees must consent to the retirement (per sub-section 2(1)). A person who holds office as both trustee and executor may retire from the trust, but continue to hold the office as executor. Re McLean (1982) Ontario Supreme Court Facts: Bennett, one of the original trustees under the will, resigned (with consent) as a trustee. The estate brought an application for his removal. Issues: Can a person be an executor, without being a trustee, if that person held both positions at one time? Holding: Yes. Reasoning: It is not uncommon for a person to be both trustee and executor, since after a person dies, the executor holds the deceaseds property in trust, until that property is administered.23 The executor will pay the deceaseds debts and funeral expenses this is a winding-up function, as opposed to a preservation and growth function. Justice Osborne considers Foxwell v. Kennedy but he determined that the case did not apply. The ruling in that case stipulated that failure to act as an executor was considered as evidence of

23

These are very similar positions. Both an executor and a trustee hold property on behalf of another. Both have a fiduciary obligation. Many provisions of the Trustee Act apply to executor. The case is about the differences between the two. A trustee is allowed to resign, but an executor needs the courts permission to step down (as the executor is appointed for life).

disclaimer of the trust. In this case, Bennett fulfilled his responsibilities. Rationale: The common law considers the position of trustee and executor as different functions, and therefore, a person may retire from being a trustee and continue to be an executor. Oosterhoff raises some important questions: Who bears the legal costs of the trustees retirement? Must a trustee give reasons to retire? Can a sole trustee retire (given that co-trustees must consent)? A court may remove a trustee from office due to: misconduct, bad faith, inability/unwillingness to carry out the duties, personal benefit from the trust, acting in the detriment of the beneficiaries, other reasons that show unfitness. Conroy v. Stokes (1952) British Columbia Court of Appeal Facts: Two of five beneficiaries applied to the court for removal of the trustees. Issues: Should the court accept this application? Holding: No. Reasoning: The majority of the beneficiaries did not express dissatisfaction with the trustees. The judge did not find misconduct, although the judge did find friction between the applicants and the trustees. A court will intervene, not for every a mistake or neglect of duty, but if the trustee has endangered the trust property. The court will strive to act in the interests of the beneficiaries [see Lord Turner in Re Tempest above]. Rationale: The beneficiaries cannot force out a trustee merely because of friction. Powers and Rights of Trustees Recall, there are two types of powers.24

24

The Trustee Act provides basic powers to trustees: power to insure the property, to issue receipts, to renew leases, etc.

1. Administrative powers to sell, mortgage, insure,25 or invest

the property (about preserving property),26

2. Dispositive powers to pay or transfer income or capital, to

encroach on the capital i.e. for maintenance or for advancement, or power of appointment (about distributing property). The trustees can enlarge their powers in one of two ways. They can apply to the court for an increase in powers, but this is limited to emergencies generally. They can also apply via the Variation of Trusts Act with the consent of all of the beneficiaries. In the following case, Re McIntyre, the court used its inherent supervisory power to give maintenance allowance to the children beneficiaries. Re McIntyre (1905) Ont. Supreme Court Facts: The testator died leaving no express provision for maintenance for his two minor sons. He left them a considerable legacy at $4000 each. The plaintiff wants the maintenance to come from the residue, while the defendant wants the maintenance to come from the childrens legacies. Issues: How is the maintenance to be generated? Holding: Maintenance can be generated by both the residue and the interest on the legacies. Reasoning: Chief Justice Moss cited Binkley v. Binkley to hold that a child is entitled to maintenance, but that it must come from the interest of its legacy, if there is no other source. However, in this case, the testator left a residue and an income to his wife, which can provide maintenance. The infant will not receive the capital until the age of majority; it is entitled to the income, however.

25

Today, it might be a breach of duty not to buy insurance. It is also recommended that the settlor grant the trustee the power to insure above the limit recognized by statute.
26

The trustee may alienate parts of the property, but with the goal of preserving the property. We can consider a court application as an example of an administrative power.

Rationale: The court likely will not interfere with the capital of a legacy, but it may draw upon the interest of the legacy and upon the residue of the testators estate for maintenance. The power of advancement allows the trustee to draw upon the capital to allow a minor to take advantage of an opportunity. A court will order an advancement only if the beneficiary would be entitled to the capital, but it has failed to meet the age requirement. The power of encroachment allows a trustee to distribute capital to an income beneficiary. The court will intervene on application by a beneficiary to determine whether a trustee has exercised its discretion beyond the scope of the power given to it or in bad faith. Now, modern trusts generally give lots of dispositive power to trustees. This, however, can lead to complaints about the disposition. A person can challenge the exercise of a power in two ways: 1. By alleging that the trustee exceeded its power, 27 or 2. By alleging a breach of the duty of loyalty. Every trustee owes a duty of loyalty, as do many non-trustees. The duty of loyalty means the duty to act in the beneficiaries interests rather than your own. The common law describes this duty in terms of actions trustees must not do: no-conflict and noprofit rules. The trustee may be on both sides of the same transaction and therefore, the trustee must approach the transaction cautiously. These are characteristic features of the common law on trusts, because they are so strict. The duty of loyalty, Professor Smith describes, comprises a duty to act with the right motive. This does not concern the outcome, but about the process: was the decision made with loyalty?28 This issue concerns how the trustee should act, not whether the trustee should act [see standard of care, below].
27

Recall, a power to dispose to children does not allow disposition to a nephew. Otherwise, it would be a breach of trust.

Consider to X in trust for A for life, then to B absolutely. A is the income beneficiary and the object of the power of encroachment of the capital. The trustee has authorization to treat A and B unequally. The trustee is supposed to be motivated by the purpose of the power. The court, for example, examines motive in Fox [even if there was no conflict in this case]. This is an example of judicial review of an administrative action. The court will not concede that the decision was wrong because this decision does not belong to the judge; the judge can whether the mother exceeded her jurisdiction by making her decision in the wrong way. This case is unusual, because the courts are deferential to the appointor. The process of decision-making in this case was poor. Fox v. Fox Estate (1996) OCA Facts: The testator left his wife as trustee of his estate, with the power of encroachment on the capital. The testators son married to a gentile and his mother exercised the power in favour of her grandchildren. Issues: Did the trustee exercise her discretion beyond the scope of the power given to her or in bad faith? Holding: The exercise was in bad faith. Reasoning: Justice Galligan determined that concern for the welfare of [the trustees] grandchildren would be a proper motive to encroach on their behalf. However, Galligan found that this was not the motive. The court will not intervene unless it is clear that [the trustee] would not have acted as he did had he not taken into account considerations which he should have not taken into account [and
28

vice-versa]. Disapproval of her sons re-marriage was an extraneous consideration to the motive of advancing her grandchilds interest. Disapproval of a marriage outside of ones religious belief cannot justify the exercise of a trustees discretion. Admittedly, the testator could have barred his son from taking a legacy. He did not. Rationale: A court may interfere with the exercise of a trustees discretion, when that exercise is based upon considerations that are completely extraneous to the trustees duties. Duties of Trustees Trustees have some principal duties: the duty of loyalty, to act impartially among the beneficiaries, to account and provide information, to avoid conflicts of interest, to preserve the safety of the trust property, and to enhance its value. Upon appointment the trustees must: Ascertain the terms of the trust, Acquaint themselves with the state of the trust property, Invest in accordance with the trust instrument and empowering statutes, Ensure proper custody of the trust property, Ensure that there were no breaches of trust prior. Trustees may also delegate certain responsibilities if: It is expressly authorized by statute, The trustee is not required to act personally, It is necessary, and It is common business practice. Duty of Care The trustee owes three duties to the beneficiary: a) Duty of Loyalty (fiduciary duty) duty to act with the right motive and to avoid conflicts of interest b) Duty to Follow the Terms of the Trust strict liability c) Duty of Care, Skill, and Diligence reasonableness

A court can excuse a trustee who acted honestly and reasonably, by looking at the totality of the circumstances. If a trustee is not sure how to act, the trustee can consult a lawyer, an accountant, or a court (to answer questions of law). If the trustee chooses to delegate, the trustee is still responsible as the principal. The trustee must choose a delegate by taking the same care (as discussed below in Wright). The court must consider a two-part test: 1. Was the trustee allowed to make the investment (strict liability standard)? 2. Did the trustee breach the standard of care when it made the investment? Traditionally, the courts did not allow investments that were risky/hazardous. Legislatures then scheduled statutory lists, which allowed for safe shareholding. During the 1970s, many people considered this to be too restrictive. Perhaps we should not judge investments in abstracto. We must judge the risk against the rewards as well as the goals that people have set. Now, under the prudent man standard, any property is subject to investment via a trust. The standard of care also is phrased in the standard of the prudent man. The trustee must consider the reasonableness of the risk and the possibility of a return. The court must now consider the whole portfolio to consider whether the trustee has breached the standard of care. Re Wright (1976) Ont. HCJ Facts: The testator died leaving a large estate. Some of the shares had not performed well and the trust company wanted to sell. None of the income beneficiaries wanted to sell at the offered price. The deed read: my Trustees shall have regard for the security of the capital and shall make investment with such security in mind rather than with the object of securing larger interest at risk of less security. Issues: Should the court advise the trustees not to sell?

Holding: No. Reasoning: Justice Craig determined that the trustees were given equal power [discretion] to sell and to retain. Therefore, the trustees can decide what is in the best interest of the beneficiaries, and the deed does not state a preference: only that they do not assume too much risk. This is where powers and duties make an important distinction. If the trustee as the duty to sell, but the power to keep, the trustee should sell if there is no good reason to keep (and viceversa). In Re Fulford, the court held that the trustees will not be liable if they honestly and with due care exercise the discretion vested in them. In this case, the trustees acted prudently and in the best interests of the beneficiaries. Rationale: Even if the beneficiaries do not concur with the trustees decision, the trustee is free of liability if it acts otherwise, but in the best interests of the beneficiaries. Fales v. Canadian Permanent Trust Co. (1977) SCC29 Facts: The testator left shares of a drilling company to his wife, the plaintiff, (in life interest) and children (in absolute interest) in a profitable company. The plaintiff and CPT were trustees. The plaintiff and other shareholders were approached by Inspiration Ltd., which proposed an exchange of shares in the drilling company for preferred shares in Inspiration. Inspiration did not have a good profit/loss record. The plaintiff accepted. Inspiration went into bankruptcy and the shares became worthless. CPT made two suggestions to the plaintiff to sell. Issues: Did CPT fail to meet the standard of care? Holding: Yes. Reasoning: Justice Dickson stated that the standard of care is that of a man of ordinary prudence in managing his own affairs [regardless of whether the trustee is a professional or not]. A

29

Note: breach of trust may involve negligent misrepresentation as well.

trustee must be alert to changes in the value of the trust property. It does not mean that the trustee must act hastily to sell, but rather, it must act prudently and consider the options. Dickson explained that the trust officers in charge of this estate never attempted to market the shares, or consult others about the decline in value. CPT never felt a sense of urgency, even though the shares represented 60 percent of the estate. The firm never analysed the trends, nor did it make suitable recommendations to the beneficiaries. Rationale: Failure to pay attention to the seriousness of a decline in value of a large portion of the trust property may constitute a breach of trust. Speight v. Gaunt (1883) House of Lords Facts: The testator left a large estate to his friend as trustee in trust for the testators widow and children. The trustee had no special investment knowledge. The trustee gave 15 000 to a stockbroker, who never bought the stocks and took the money. Issues: Is the trustee liable for breach of trust? Holding: No. Reasoning: Lord Blackburn stated that a trustee is entitled to delegate to stockbroker and advance the capital to him, since it is the usual course of business. The trustee took appropriate care, and he could not be blamed because the stockbroker was dishonest. There was nothing to signal that there was a risk that the money would be stolen. Rationale: If a trustee takes appropriate care in delegating a responsibility, the trustee will not be liable if the delegate is dishonest. Learoyd v. Whiteley (1887) House of Lords Facts: The testator directed his trustees to invest 5000 in real securities. The trustees employed local appraisers to advise them of an investment in a mortgage for the development of a brickyard. The business failed and the trust suffered a loss. Issues: Are the trustees liable for the loss? Holding: Yes.

Reasoning: Lord Watson explained that the trustees must stay within the terms of the trust. Although a trustee often will employ the advice of a third party/professional, it is up to the trustee to assume responsibility for the decision. Although the trustees asked their solicitor to inquire into the respectability of the company, the trustees received no information. The trustees who chose to invest must accept the risk that their decision was imprudent because they failed to exercise ordinary care by inquiring into the business. Rationale: A trustee cannot blindly rely upon the advice of a third party professional, without exercising ordinary care by making appropriate inquiries into the risk of the investment. The investment in Learoyd was a safe investment; however, the trustees did not meet the standard of care by not asking enough questions into the operation of the enterprise that used the land. Re Smith (1971) Ont. HCJ Facts: The settlor created a trust, which left shares in Imperial Oil to his son, subject to a condition that he pay a quarter of the annual income to his mother (the settlors wife). When the son reached the age of majority, he transferred a quarter of the shares to the trustee and directed that the income be paid to her. The income, however, was inadequate for the mother, and she wanted to sell the shares. The son did not. Issues: Should the trustees sell the shares? Holding: Yes. The court found that the trustees had not been impartial (they favoured the son) and the court replaced them. Reasoning: Justice Keith stated that the income from the shares did not represent a good return given that other safe investments in the market were giving a higher yield. The only reason why the trustees appeared to have retained the shares is that the son wanted to keep them (presumably because he would get the shares when his mother died). Rationale: The trustee must consider the interests of all of the beneficiaries including the life and absolute beneficiaries to

determine how to invest the funds [hold an even hand]. The shares in this case paid a very low dividend and it was inadequate for the income beneficiary. This creates a tension between beneficiaries, because their interests are opposed. Trustees must keep accounts and be ready to present those accounts.30 Additional Notes: Consider the following example of a PERCENTAGE TRUST. Every year A gets 5% of the value of the capital. Now, the beneficiaries will not care how the fund is invested. The income beneficiary benefits even if the capital rises. Even if the investment generates a lot of income, the income beneficiary gets 5% only. The Income Tax Act, however, does not allow trustees to distinguish between capital and income. Duty to Account Trustee beneficiaries can demand the documentation that pertain to the administration of the trust. In principle, the trustees are entitled to this information, because the information belongs to them. However, the trustees are allowed to make decisions regarding the administration, without giving reasons as to why unless the court orders the disclosure of that decision.31 The information issue poses a problem with discretionary trusts, since no one trustee has any certain interest. For objects of powers of appointment, they have no proprietary interest in the trust property. Now we say that a proprietary interest in the trust is neither necessary nor sufficient. Schmidt v. Rosewood Trusts Limited (2003) HL Facts: Schmidt claimed that the trustees had frustrated his efforts to find out information about the trust investment. Issues: Does a beneficiary have a proprietary interest in the information?
30

This is not the same of accounting for profit which is a remedy that requires a defendant to give up its gain. 31 If a beneficiary sues a trustee, they may be entitled to information (that would otherwise be confidential) by discovery.

Holding: No; however, the trustee may get certain information by way of the court. Reasoning: Lord Walker held that trustees can make their allocations in confidence for discretionary trusts. Disclosure may have to be limited. The court holds a supervisory function, such that it can balance the largess of the interest with the information requested by the trustee. Rationale: A beneficiary can apply to the court for disclosure of information in a trust. ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________

______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________

ALTERATION AND TERMINATION OF TRUSTS Termination by the Terms Once the trustee pays all of the trust property, the trust expires (i.e. once all of the capital clauses have be activated). Termination by the Settlor (Dispositive Power of Revocation) Generally, the settlor cannot revoke a trust unless he maintains the power of revocation. This can pose problems, namely negative tax implications and evidentiary difficulties to show that intention was certain. Note: the power of revocation applies only to trusts during the life of the settlor. To determine whether the trust is an inter vivos trust, the court will consider the intention of the trustee and the time at which trust property vests in the trustee. Recall, that a trust is constituted when the three certainties are present, with capacity, and with constitution of the trust. Termination by the Beneficiaries

1. The rule in Saunders v. Vautier stipulates that the

beneficiaries who are sui juris and whose interests are vested can terminate the trust and distribute the property.32 The beneficiaries, collectively, can terminate the trust even if it is contrary to the wishes of the settlor.

2. The beneficiaries must all be ascertained and together, their

interests account for all the interests in the trust property. This includes gift overs. The court cannot consent on the behalf of beneficiaries that are not sui juris.33

32

Sui juris means that the beneficiaries are of majority and of full mental capacity.
33

A contingency (condition subsequent or determining event) will not necessarily postpone the implementation of the rule. The drafter can include the word and his issue to limit the possibility of a Saunders termination.

3. Objects of power have to agree as well. 34

4. Application to the court is not required.

5. Beneficiaries cannot vary the trust (see Brockbank).

The trustees can decide for themselves as to how they want to divide the property. This can conflict with the purpose of creating the trust; however, historically, trusts were created to hold property for the benefit of male heirs before they reached 21 to avoid payment of relief to mesne lord. Why is this so? The beneficiaries are the equitable owners and the property belongs to them, even if there is a condition precedent. Once a person is capacitated, the court will leave the property for them to administer for itself. Note: even if there is a gift over, if the beneficiary has a power of appointment, it can appoint himself and then apply the rule in Saunders v. Vautier.35 We can equate the right of sui juris beneficiaries with ownership; however, this type of ownership is under the discretionary supervision of the court and the administration of another. Consider the following example: A has the power to appoint the capital during As lifetime to anyone. B takes in default of the exercise (gift over). A can terminate alone, because A can appoint the capital to itself (Barford v. Street). We do not consider A as the beneficiary alone, but as the donee of a power.
34

Powers held in a fiduciary capacity cannot be released unless expressly authorized. Therefore, if they cannot release those powers (i.e. to appoint), the settlor may avoid Saunders. These people may not get anything, but must still consent to the termination. A settlor can insert a gift over, with beneficiaries that are minors or unascertained.
35

In Re McCrossan, the settlor made a voluntary settlement in favour of her and her husband for life, and then in favour of herself for life with the power of appointment via will. After her husbands death, she applied to terminate the trust. She had not exercised the power; she released it and thus could claim. Justice Verchere considered whether any other potential beneficiaries would have a claim to the trust property. There is no gift over and the settlor is alive to exercise the rule.

Consider this example: A has the power to appoint the capital by will; B takes in default. A might direct the capital into As estate. A generally cannot encroach on the capital, because unlike Barford, A cannot exercise the power in the immediate. Variation of the Trust A trust instrument may grant discretionary power to trustees the power to vary the trust subject to public order rules (see Fox v. Fox Estate above). Under Saunders, the beneficiaries have the power to vary it; however, the trustees must consent to the variation. This results in a new trust. The courts ability to vary a trust is limited to certain situations by virtue of the common law: When the applicant asks the court to convert realty into personalty for a minors benefit, When a dispute requires settlement, Emergencies that threaten the existence of the trust, and Maintenance (by taking capital to convert to income for beneficiaries who need it, but are not yet entitled). However, statutes have expanded the powers of the courts to allow variations of management or administration [for example, if the trustee wants more time before it has to sell property]. The Alberta Trustee Act has even abolished the rule in Saunders v. Vautier, since the court must approve variations or terminations of trusts unless the trust instrument says otherwise. The statutes give the power to the courts to consent to an arrangement to vary the trust on behalf of non-sui juris beneficiaries. The authors of the Blue Book add that all sui juris beneficiaries must still consent and that the court will not consent on their behalf. The trustees will present the arrangement (or the variation) with affidavit evidence. The court will supply the consent for the non sui

juris beneficiaries, only if it is for their benefit. The Public Guardian and Trustee will act on behalf of minor and unborn beneficiaries. The following case, Re Irving, illustrates that the court will consider whole arrangements and will approve or disapprove accordingly. Re Irving (1975) Ont. HCJ Facts:

At the time of the litigation, Edith was 59, and her children were 27 and 28. Each of Ediths children had an infant child. The trust gave the trustees no power of variation. The affected classes are as follows: a) b) c) d) Those who are alive and who may ultimately take, Those who are unborn and who may ultimately take, Persons who are unascertained and who may take, and Persons subject to Ediths discretionary power.

Justice Pennel determined that all of those groups were represented at the hearing. Issues: Should the court accept one of the two arrangements put forth by the trustees to vary the trust? Holding: No. Reasoning: Section 2(2) of the Trustee Act requires that the court maintain the status quo unless the trustees can show increased benefit for the beneficiaries. Changes, Pennel says, work against the intention of the settlor and therefore, the court must be careful when varying a trust. The Variation Test 1. Does the arrangement kept to the basic intention of the

settlor? 2. Will those who may become interested in the future benefit? 3. Would a prudent adult, motivated by intelligent selfinterest and sustained consideration accept the arrangement? Basically, the children want Ediths life interest paid out to her and the remainders paid to them. Alternative #1 Under this alternative, the trustees proposed the creation of two funds: a $10000 fund for Ediths issue, and a $1000 fund for next of kin other than Ediths issue. Pennel held that the trust was meant to benefit Edith and here children primarily. The children would have real use for the money and the arrangement would save $5000 a year in tax revenue. Pennel said that the spirit of the Act, permits pruning of the trust in order to promote fruitfulness, but the root is to be preserved. Pennel determined that the proposed funds did not give enough to potential issue. If the children predecease their mother, the issue could receive a very large share. Edith may choose not to appoint her children as recipients of the estate. The judge must consent on behalf of the ascertained grandchildren and the [un]ascertained next-of-kin. Alternative #2 Under this alternative, the trustees will life insure the funds that each of the applicants is entitled to, so that the applicants will receive even if they die too early. Pennel held that the applicants had not given adequate details of this scheme, nor made appropriate arrangements to compensate the trustee (Royal Trust). Therefore, he adjourned the motion. Life insurance policies can produce the contingencies.

Rationale: The variation must benefit beneficiaries who may take and therefore it cannot short-change those beneficiaries for those who have a more immediate interest. The next of kin often have very remote interests. Teichman v. Teichman Estate (1996) Man. CA Facts: The testator left half of his estate to his son and daughter equally. The trustees paid a weekly income to the daughter, instead of the capital, because she suffered from depression. Upon getting better, the siblings and the PGT proposed an arrangement to vary the trust. Issues: Is the arrangement valid? Holding: Yes. Reasoning: Justice Huband accepted an arrangement whereby the daughter would receive the capital, subject to the creation of a trust, held by the PGT on behalf of her surviving issue. Rationale: The court will accept a variation, if it benefits ALL of the parties who could possibly take via a trust. This case shows that the ascertained beneficiaries cannot take all of the trust property, without leaving something for the other unascertained beneficiaries. Problems arise when the trustees do not have the power to vary the trust and economic conditions change i.e. inheritance taxes increase, inflation increases, etc. Other issues regarding variation The settlors intention is now irrelevant, because variation is built upon the logic of Saunders, where the parties choose to act for their own benefit. This might be different in Manitoba and Alberta, which have abolished Saunders. In most cases, the court approves on behalf of incapacitated persons or unascertained persons. An adult with a contingent interest would have to consent, because that person still has an interest. However, consider the following example: to A and to As surviving spouse. A is not married. The court will have to consent on behalf of the unascertained person.

The court may be able to consent on behalf of missing persons. The trustees would have to ask for special treatment. In PROTECTIVE TRUSTS, the court can also consent to a variation for beneficiaries in a discretionary trust, after a defeating condition terminates a primary trust. For example, if the primary beneficiary, X, spends his trust income poorly, and the benefit ends, the court can consent to a modification on behalf of Xs family members, even if they are adults.36 FORMALITIES OF TRUST CREATION

The Statute of Frauds required writing, signed by the promisor or the settlor, for various transactions. In the Ontario Act, ss. 4, 9, 10 deal with land contracts and trusts. Absence of writing renders the contract unenforceable, but not void, because the writing can occur at the later date. Trusts arising by operation of law are excluded. Section 11 of the Statute of Frauds requires that transfers of equitable interests be in writing. Otherwise, the transfer is void. This rule applies to any beneficial interest. This rule benefits trustees, because trustees must follow the terms of the trust strictly. Wills Acts require that wills are evidenced by writing. They apply to dispositions that occur at death. It must be signed by the testator and 2 witnesses.

Additional Notes:

36

Very often, these trusts have protectors that need to provide approval for administrative or dispositive decisions of the trustees. Protectors do not own the property as trustees. The settlor often retains this role. We have to consider what duties the protector owes to the beneficiaries. The settlors want the appearance that the property does not belong to them anymore that is, not a bare trust; however, they want control at the same time. These two goals are incompatible. This is just as inconsistent as including precatory conditions with a trust.

______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________

______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ RESULTING TRUSTS Presumptions of resulting trusts seem counter-intuitive; however, people used to hold land in uses and it was likely that the recipient was not intended to receive a gift. The modern emanation of resulting trusts seems less obvious. A resulting trust occurs when a person receives an asset at anothers expense, but that person was not supposed to receive the benefit of the asset. The resulting trust is only triggered if there is a problem with the beneficial interest [e.g. Hannock]. If terms fail that have nothing to do with the beneficial interest, there will be no resulting trust. However, resulting trusts might fall into one or the other, which makes the classification a little incoherent. It would be more coherent if they were seen as a subcategory of constructive trusts? Two main categories of resulting trusts: 1. Creation of an express trust, with failure of all or part of the beneficial interest (and the trustee is not intended to benefit). 2. Gratuitous enrichments: presumption of a resulting trust. 1. Failure of an Express Trust Hodgson v. Marks (1971) CA Facts: Hodgson transfer her house to her lodger to prevent her nephew from kicking the lodger out. The lodger sold the house to Marks. Issues: Did Marks own the house or was he holding it on trust for Hodgson?

Holding: He held the house on trust. Reasoning: Lord Russell explained that Hodgson never intended to make a gift to Evans, and that she intended to retain the beneficial ownership of the house. The attempt to create an express trust failed, and thus, Hodgson retains the beneficial interest. Rationale: Failure to effect a transfer in writing, or failure to intend to create an express trust can lead to a resulting trust. Resulting trusts that arise by operation of law do not need to meet the writing requirement. Resulting trusts will not arise when the transfer of assets occurred for an illegal purpose, or when the money can be used for similar charitable purposes (cy-prs doctrine). It would be unjust for the trustee to retain the beneficial interest in the property when the express trust fails. How do we avoid resulting trusts? This is all about intention. If we can show that the settlor never intended to have the benefit of the property by resulting trust, then there is no resulting trust. These situations also deal with surpluses. 1. We can turn them into gifts. Re Barrett (1914) Supreme Court of Ontario Facts: The testator left the contents of his bank account to his daughter to meet the expenses in connection with the keeping of the house. Issues: Did the disposition create a gift or a trust? Holding: A gift. Reasoning: Meredith C.J.O. held that the words of the testator clearly stated that he gave the money to his daughter. The money was to alleviate the cost of maintaining the house. The disposition did not create an obligation to maintain the house, but it enabled the legatee to do so.

Rationale: The court can construe a disposition as gift to avoid the imposition of a resulting trust on the surplus. We have seen cases like Barrett before, only with the reverse: courts creating trusts to correct defects in the creation of gifts. 2. The rule in Hannock v. Watson explains that if a trust or condition is engrafted upon the benefit for the beneficiary of a trust, which then fails, then the beneficiary takes the interest to avoid the situation of a resulting trust. Re Goodhue Trusts (1920) Supreme Court of Ontario Facts: The testator, Harriet received income from a settlement. She had the power to appoint the remainder of her life interest to her issue. She exercised the appointment via will. However, the condition that compelled her children to make subsequent appointments was void for remoteness. Issues: Do the children receive the benefit of the capital free of conditions or do they just get a life estate with a resulting trust to Harriets estate? Holding: The children receive the full benefit via the Rule in Hancock v. Watson. Reasoning: Justice Matsen explained that the condition was distinctively severable from the rest of the disposition. She did not want to create a situation with a resulting trust, because she directly chose to exclude a certain branch of the family (that might benefit if the residue was redistributed via the rules on intestacy). Rationale: Where the settlors intention is clearly not to have a situation with a resulting trust, the beneficiaries will take free of conditions. There were three possible choices that the judge could have made: 1. The trust property was held via resulting trust for the estate, 2. The capital is subject to a power of appointment, but failure to exercise the power would have led to a resulting trust, and 3. The capital goes to the children absolutely. Matsen J. chose this option. Another situation when the resulting trust will be excluded is when there is a gap between interests. Consider for example, to A for life

then to B, and A disclaims or surrenders the life interest. There are three options: 1. The interest can accelerate to B to close the gap, 2. The interest can be held in resulting trust until A dies, or 3. A and B can apply the rule in Saunders to terminate the trust. 3. In situations of unincorporated associations, which have no personality in the common law, the money may devolve to the members of the organization. This may not be true with pension surpluses, as the money may devolve to the employer (settlor). *If there are multiple settlors in a resulting trust, the money goes back in proportion to the contribution. Whenever we see a gap, and there has been no legally effective declaration of how or for whom they hold it, the primary instinct is the resulting trust. We are talking about when intention runs out. 2. Gratuitous Enrichments This is not a situation where the person gets the property in the character of a trustee. Consider the following example: A conveys property to B, and A conveys property to C in a will. a) If B holds the property as a gift, then C gets nothing. b) If B holds the property in resulting trust, then A can convey its equitable interests to C. Presumed resulting trust situations: Purchase money resulting trust: When A buys property, but asks that the property be conveyed to B, B is the legal owner, who holds it on resulting trust for A. If A provides the legal price, but A and B take title jointly, Bs interest is held on resulting trust for A presumptively. Or, if A and B provide the purchase price equally, but A takes title solely, the court will presume that A holds the property in trust for A and B as equitable tenants in common. Equitable tenancy in common allows for the division of the equitable interest into shares.

If people take title as joint-tenants, however, this might be enough to counter the presumption. The presumption is rebuttable. It still creates a problem, because the legally the parties might hold in tenancy in common, but they would hold the property as tenants in common in equity.

Voluntary transfer resulting trust: The volunteer is the person that benefits from a transaction without consideration. The property is presumed to be held on resulting trust.

The intention is determined by the facts and by the presumption. The settlor intended to create a trust. If the presumption works, then we have an intentional trust. Neazor v. Hoyle (1962) Alta. Sup. Court Facts: Kathleen married John, but the couple never lived together. John transferred some land to his sister to prevent Kathleen from succeeding to it. He obtained the rent and profits, but she paid the taxes and received money when the property was expropriated. Issues: Is Kathleen or the sister entitled to the proceeds? Holding: The sister. The presumption of resulting trust was rebutted. Reasoning: Justice Macdonald found that john had no affection for Kathleen. The marriage was unsatisfactory. John did not want his wife to have it. John was also fulfilling a promise to his parents to keep the land beyond Kathleens reach. The rental income that John retained was for support Kathleen maintained the land by paying taxes. The deceased made his will 6 months after the transfer to his sister, leaving everything to her. Rationale: The presumption of resulting trust, as between brother and sister, is rebuttable if the evidence can show that one party intended the other to hold the benefit of the property.

Theories of Resulting Trusts Nothing may be said about express trusts. The court may decide that there is a trust at the moment of transfer. Why should that be? Theory # 1. Resulting trusts that arise upon the failure of an express trust arise by operation of law. It has nothing to do with intention of the settlor. Whereas, resulting trusts that arise on gratuitous enrichments are based upon a presumed intention to create a trust. Again, they are presumed to be intentionally created even if the settlor was never vocal about the creation. This is a presumption of a positive intention that the property still belongs to the settlor. This is counter-intuitive, since the intention is a fiction created by law. Faced with the Statute of Frauds, it is not at all obvious that resulting trusts because of gratuitous enrichments, should be exempted from the writing requirement. Theory # 2. Professor Chambers argues that if A transfers property to B, not intending that B have the benefit, then a resulting trust arises by operation of law. This seems to be a simpler view of the resulting trust. This theory applies to failures of express trusts. The settlor did not intend that the trustee have the benefit. When it applies to gratuitous enrichment, Chambers says that the settlor did not intend the transferee to have the benefit of the property. These trusts are all created by operation of law, because no intention is proscribed. Consider the following example: A conveys property to B, and A conveys property to C in a will. B was not supposed to have the benefit. If the presumption did not intend B to benefit, then B holds the property in resulting trust for A. The unified theory: so long as the settlor did not want the transferee to benefit, a resulting trust arises by operation of law. If we look at Hodgson v. Marks, we can see that it straddles the line between the two categories. Hodgson cannot plead bad intention (and therefore she cannot plead express trust) and on this view, it does

not matter. The Statute of Frauds prevents Hodgson from proving an express trust, resulting in pattern. Even though the express trust is unenforceable, nonetheless, based upon the facts, the court can conclude that Hodgson was not making a gift of enjoyment of the land. For Chambers, all Hodgson has to prove is that Evans was not to benefit from the property: and therefore, the beneficial interest springs back. Theory #1 presumed intention to create a resulting trust Theory #2 presumed that the transferor did not intend that the transferee to benefit.

Presumption of Advancement
Gratuitous enrichments involve the presumption of resulting trust. However, in some situations, based upon the persons involved, the court may presume the opposite. These are called PRESUMPTIONS OF

ADVANCEMENT of a presumption of gift. A transfer from father to child involves the presumption. This includes persons in loco parentis. The law is conflicted with respect to advancements from mother to child, traditionally. The case law is confused. Re Wilson (1999) Ont. Sup. Court Facts: Lenore Wilson suffered a stroke and she gave power of attorney to her son. She also transferred ownership to her and her son, Colin, jointly over her finances. Dennis Wilson, the plaintiff, was concerned over his brothers use of the money. He contended that Lenore transferred the money to Colin and herself as trustees, with the resulting trust to benefit Lenore. Issues: Is there a presumption of resulting trust? Holding: No. There is a presumption of advancement. The court found that the plaintiff rebutted the presumption. Reasoning: Justice Fedak held that the law usually presumes that a gift was not intended, unless the parties are in a special relationship whereby the courts will presume advancement. These

are cases when the transferor acts in loco parentis. Based upon the case law, however, Fedak found that mother-to-son transfers did fall under the category of a special relationship. He distinguished Edwards v. Bradley. However, the plaintiff rebutted the presumption of advancement by showing that Lenore never intended the money to be held jointly for both her and her sons benefit. Rationale: In a transfer from mother to child, the court can find a presumption of advancement. McLear v. McLear Estate (2000) Ont. Sup. Court Facts: The defendant daughter held GICs in joint tenancy with her mother, who died. The brother claimed his share of the GICs. Issues: Should the transfer between mother and daughter be presumed to be an advancement? Holding: No. Reasoning: Justice Heeney explained the fundamental assumption that historically justified the presumption of advancement in transfers from father to child was that of financial dependency. The judge considered itself bound by the Supreme Courts Edwards v. Bradley decision, and held that it was a presumption of resulting trust. The onus is on the daughter to prove that the mother made an advancement (and that they held the money as joint tenants). Henney found that the defendant did not rebut the presumption and therefore the mother did not intend to make a gift. Rationale: As a strict matter of authority, the court followed Edwards v. Bradley. The court suggested that the presumption of advancement should apply while children are dependent; the presumption of resulting trust would apply when the children are independent. It is sceptical whether one can relate legal obligations of support to the application of the presumptions. Why not always say that there is a presumption of resulting trust for both? We could say that a presumption of advance for both, only

when the children are establishing themselves in life. Do we really need the presumptions? Courts rely on the evidence anyway.37 A transfer from husband to wife involves the presumption of advancement, but not from wife to husband, not between cohabitees, not after the marriage ends. Those are all situations with presumptions of resulting trusts. The rule is unsuitable for same-sex couples. The legislation is a complicated patchwork: British Columbia and Manitoba have no legislation. Some provinces rely on an older model that abolishes the presumption of advancement between husband and wife. They rely on the presumption of resulting trust. The legislation continues to state that if the property is held in joint tenancy, this is prima facie proof that: Each spouse is intended to have on a severance of the joint tenancy, a one-half beneficial interest in the property [just like they would have a one-half legal interest in the property]. So what, about the proof. If a husband or wife conveys property to both of them in joint tenancy, then the other should take the whole property in common law on death. The legislation purports to say, though, that the resulting trust applies to the property in equity: meaning that the surviving spouse must rebut the presumption of resulting trust, otherwise, the surviving spouse does not get the equitable estate to the legal estate that it owns absolutely because of the joint tenancy. Ontario and others rely on the new model. Additional Notes: ______________________________________________________ ______________________________________________________

37

What is the rule that makes sense? When a father buys clothes for a child, there is a presumption of advancement; when the mother does so, there is a presumption of resulting trust.

______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________

______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________

CONSTRUCTIVE TRUSTS Unjust enrichment Unjust enrichment and constructive trust are not synonymous.38 Unjust enrichment can exist, for example, when a person pays someone elses debt. There is no trust property to become the subject matter of the trust. Chambers might say that: if a trust reverses unjust enrichment, it is a resulting trust. If A transfers property to B, not intending that a B have a benefit, then a resulting trust arises by operation of law. This argument also potentially gives a role in the law of unjust enrichment as well. The typical case is a mistaken payment of $50. Chambers would say that the plaintiff is the beneficiary of a resulting trust and not a resulting trust. It has the pattern of a resulting trust.39 However, the plaintiff did intend the defendant to benefit, but at the time [which makes theory #1 not apply, because the settlor did not want to make a trust]. It was only until the plaintiff discovered the mistake, did the intention go away. Perhaps this does not make it a trust. We can consider two common situations: 1. The plaintiff has transferred money or chattels to the defendant by mistake, duress, undue influence, fraud, or on other condition.40 The defendant has the property without consideration. In most cases, the court will order the defendant to repay the money, assuming the defendant does not have a defence [see Birks]. Three elements: enrichment of defendant, corresponding deprivation, and no juristic reason. If the plaintiff establishes the three elements, and the defendant does not defend successfully, the defendant must make restitution.
38

There are no constructive trusts in the civil law. An unjustly enriched party will owe an obligation to repay.
39

Look to the definition by Underhill to compare express, resulting, and constructive trusts. Perhaps this fits within it? 40 Mistaken payment (unjust enrichment by subtraction).

When the defendant transfers chattels or money, the court will order the transfer of money. The plaintiff is not entitled to the property back; the title has passed. The primary duty is to give the property back; however, the court will only enforce the substitute duty to give money. A court wants to minimize difficulty of duty. The transferee holds the money or chattels on constructive (or resulting) trust for the transferor. Consider also: the plaintiff has performed services (in anticipation of a contract). There is a controversy as to whether these cases are unjust enrichment, because the loss does not equal the gain. There are rules that govern whether the court may give back the value of the gain, or the degree of the loss. 2. Enrichment through wrongdoing may lead to a restitutionary remedy. Generally, for breach of contract, the breaching party does not have to forfeit profits. These cases are not necessarily unjust enrichment, when the plaintiff is not enriched at the defendants expense (Keech v. Sanford). The defendant acquires the benefit from a third party. This is different from an unjust enrichment involves the shifting of a gain. The plaintiff is being put into a better position, in Keech (se also the cave case). Commonalities Between 1 & 2 Defendant is enriched Differences Between 1 & 2 The source of the obligation is different. Unjust enrichment is not generated by wrongful conduct. The foundation of the wrongful enrichment cases is based upon conversion, breach of trust, breach of conduct, etc. The plaintiff does not need to show a reason for the restitution. The plaintiff does not need to show deprivation. The word restitution is not

Legal system is unhappy about the situation: it is unjust The enrichment is at the expense of the plaintiff (impoverishment vs. wrong) Defendant must concede the

gain, in a remedy called restitution.

appropriate for wrong doing, because the defendant is not giving back, but is giving up gains (disgorgement). The plaintiff in group 1 does not end up better off.

Trusts in wrongful enrichment cases are not resulting trust cases, because these cases do not give back settled property. Therefore, it fits with Chambers argument. Constructive Trusts in the Two Situations Much of the litigation that discusses constructive trusts arise out of co-habitational disputes. The principles in these cases are probably different from mistaken payment cases. This is about the equitable transfer of what is left at the end of a relationship. In Peter v. Beblow, the majority held that the principles are the same for all unjust enrichment by transfer cases. In Peter v. Beblow, the plaintiff must show the claim: 1. Is there an enrichment? 2. Is there a detriment? 3. Is there the absence of a juristic reason. Then, the court will consider whether the plaintiff is entitled to a monetary award or a constructive trust. In theory, like injunctions (when the court will consider irreparable harm by damages), the plaintiff must show that the money award will be inadequate. The plaintiff must also show a link to the property in issue. The plaintiff must show a particular interest in a particular asset to pull it out of the defendants patrimony. In a mistaken payment case, the plaintiff gave the property to the defendant, and the defendant ought to give it back. In the cohabitational cases, the link can be indirect. Rawluck v. Rawluck (1990) SCC on appeal from OCA Facts: The parties had been married for 30 years. They acquired several parcels of real property and the husband took title to most of them. The wife applied for equalization when the parties separated. The value of the husbands portion increased significantly between the date of separation and the trial. Issues: Is the wife entitled to a half-interest in the increase? Does

the Family Law Act oust constructive trusts declared after the date of separation? Holding: Yes. No. Reasoning: Justice Cory held that the legislation did not expressly oust the constructive trust for questions of ownership following the separation. Section 10 of the Act allows the court to determine questions of ownership. A constructive trust arises when the unjust enrichment arises. Rationale: Matrimonial legislation does not necessarily oust constructive trusts. Critique: Justice McLachlin held that the right to equalization was a legislative substitution for the constructive trust. The constructive trust is a remedy which arises not when the duty to make restitution arises, but when the court orders it. The difference between a constructive and an express trust lies in that a person who holds property subject to a constructive trust does not owe the same duties that an express trustee owes: duties that include duties of management. The duty is often like that of a bare trustee: to hand over the property to the beneficiary or to another trustee. There can be constructive trusts that are not unjust enrichment cases. In a large part of the majority judgment, the court elaborates upon the idea of good conscience. Soulos v. Korkontzilas (1997) SCC on appeal from OCA Facts: A real estate broker, the plaintiffs agent, made an offer from a piece of property. The vendor made a counter-offer, which the purchaser rejected. The vendor then told the broker the price that the vendor would accept; however, the broker did not tell the purchaser. The brokers wife holds the title to the property. Issues: Is the broker in breach of contract or breach of fiduciary duty? Does the wife now hold the property on constructive trust? Holding: Yes. Reasoning: Justice McLachlin held a constructive trust may arise when: 1. It is a remedy, or 2. Condemns wrongful conduct to preserve the integrity of

certain relationships. Courts have the discretion to ensure that parties do no behave in such a way that they retain property that offends good conscience. Unjust enrichment does not explain all of the situations in which a constructive trust may arise. A constructive trust may arise from different situations: through the tort of the breach of confidence, breach of contract, unjust enrichment, etc. Good conscience, therefore, may be a unifying principle that links the use of the constructive trust together. As in Hodgkinson v. Simms, the imposition of a constructive trust holds people in positions of trust to high standards of trust and probity.41 McLachlin used the language of remedy in this case. She says, equitable remedies are flexible. She applies the test laid out by the court in Pettkus v. Becker to consider whether the court should impose a constructive trust based upon the defendants wrongful conduct. Disgorgement of Wrongful Gains 1. The defendant must have been under an equitable obligation in relation to the activities giving rise to the assets in his hands, 2. The assets have resulted from agency activity, because the agent was acting, or should have been acting for the benefit of the principal, 3. The plaintiff must show a legitimate reason from the proprietary remedy, and 4. Other considerations must not render the imposition of the trust unjust on third parties. McLachlin found that the plaintiff satisfied the test. The broker owed the plaintiff a duty of loyalty, but he acted in conflict of interest with the plaintiffs interest. Secondly, the broker obtained the property as a direct result of his breach of loyalty. Thirdly, although the property did not result in a gain, if the broker was allowed to keep the property, it would compromise the institution of real estate brokerage, because clients would have no claim unless the agent
41

Personal obligations may be able to do the same.

made a profit. Fourthly, no third parties would suffer from the plaintiffs acquisition of the property. Rationale: Even if the fiduciary does not incur a benefit from its breach of loyalty, the fiduciary may still hold the property on constructive trust for the beneficiary. There are multiple solutions to this problem: the court can impose a constructive trust, which it does in Soulos, or the plaintiff could have another type of obligation claim against the defendant. A mortgagee would still have priority over the beneficiary over the constructive trust, because it would be a good faith purchaser for value. Someone who is not protected, such as an unsecured creditor, or an unregistered mortgage, might be able to stand up in court and say that a constructive trust might be harmed. If the trust arose when the facts occurred, then the intervening creditors do not deserve protection. Conversely, we seem to be saying that this is not a full blown trust, because other creditors are considered. Why do creditors get mentioned in cases like Soulos and not in cases like Rawluck? Perhaps the claim to a trust is stronger in cases like Rawluck, is because in Rawluck cases, the court is trying to put the situation back before. The creditors of the defendant will get it, and that is unfair. However, in cases like Soulos, the plaintiff could end up better off, because the gain does not come from the plaintiff. As between the plaintiff and the defendant, we do not want the defendant to take; however, as between the plaintiff and the defendants creditors, it is unclear which party should take. AG for Hong Kong v. Reid (1994) HL on appeal from NZCA Facts: The defendant, Reid, accepted bribes while a prosecutor in Hong Kong. Reid invested the money in land in New Zealand and earned a profit. Issues: Can Reid keep the profit? Holding: No. Reasoning: Lord Templeman explained that the recipient of a bribe acts as a false fiduciary. The bribe is an inducement by a third party to break the fiduciarys trust with another. The money, in common law, belongs to the recipient and it cannot be returned to the giver. The person whose trust has been broken becomes the

creditor of the bribe in equity. Equity assumes that the false fiduciary holds the bribe in constructive trust. Although this approach is subject to criticism, the recipient of the bribe should not be able to benefit from his own wrongdoing. A review of New Zealand authorities on bribery reveals that previous decisions, including Lister & Co. v. Stubbs were wrongly decided. The money is held in trust, not as a debtor-creditor relationship. Equity treats the fiduciary as having acted as if he has performed his duty (although this is a legal fiction, because the fiduciary has breached the trust an act, which cannot be undone). Rationale: If a person discovers a breach of duty due to a bribe, that person is entitled to recover the amount of the bribe and interest, if any is accrued. The recipient holds the bribe in constructive trust for the offended party. There are a range of motivations to ask for a constructive trusts: Subjective desire for the specific asset (Soulos is a good example, because the plaintiff wanted the actual building), Procedural advantages (limitation and interest), Rise in value (if the person can establish a trust, the trust theory says that the trust extends to the traceable proceeds), and Priority in insolvency (a beneficiarys claim is proprietary). We are not promoting beneficiaries, because it merely gives effects to those pre-existing rights. If there is a trust, it is just a trust claim, because the beneficiary is not an unsecured creditor. The beneficiary may get more than it parts with. The unjust enrichment explains how the trust forms. Since a trust exists, the trust carries with it the rise in value, which explains why the gain should accrue to the plaintiff. In the common law world, judges have forgotten about the order remedial possibilities, such as mandatory injunctions. When does a constructive trust arise? Does the trust arise when the court decrees it or when the defendant was obliged to pay restitution? This question remains unsolved.

In Chase Manhattan Bank N.A. v. Isreal-British Bank (London) Ltd., an English court held that although the transferor paid twice, the transferee held the money on constructive trust. This protected the money from seizure by the transferees other creditors. Rawluck also determined that the constructive trust confers right from the date that the obligation arises. McLachlin disagreed, as she said that the constructive trust is dependent on the inadequacy of other remedies for the unjust enrichment in question: that unjust enrichment and constructive trust are separate, in that one does not automatically give rise to the other. Is the Constructuve Trust Institutional or Remedial? Are Constructive Trusts Discretionary (of the judge)? In the English tradition, the constructive trust arose in only a few situations. Recall Keech v. Sanford, the defendant held the lease on constructive trust. English law did not have a general theory of the constructive trust. In the American tradition, the constructive trust is just an equitable remedy, like specific performance or an injunction. Maybe it is not really a trust at all? What do remedial constructive trusts have in common with intentionally created trusts? Property is held in trust by a trustee, Beneficiaries of the trust, and Priority in bankruptcy. Not in common: Not created intentionally (mode of creation), or Does not always involved a duty of loyalty. The constructive trustee is not necessarily liable for failing to invest the trust property. If we evaluate the claim: we have to ask what is a trust? If you think the trust is not a trust without the duty of loyalty or intention, then the constructive trust is not a trust.

If, however, all that is required is the characteristics involved with the holding of property, then constructive trusts are trusts. It depends what you include in the definition. Why call it a constructive trust if the constructive trust is not a trust? If the constructive trust arises at the discretion of the judge (like an award of specific performance), that would be a clear difference between it and the intentional trust. This would give some substance to the remedial view. It would have implications for the bankruptcy arguments. A judge may not impose a trust if it takes money out of the pool of assets (per Soulos). Does the court merely declare the existence of a trust? There is historical justification for discretionary remedialism. Peter Birks argues that this is contrary to the rule of law. What do we mean by remedial? Do we deploy the trust institution to fix an injunction or is the court simply declaring something that is there? However, if the constructive trust arises before the judgment and the judgment merely identifies its existence, then it is like an express trust: because the judge in a trust dispute will evaluate whether or not a trust was created. If the constructive trust are judicial creations, it would make it very difficult from express trusts. It is not clear that constructive trusts are discretionary. Some cases do suggest that they are (disgorgement cases like Soulos, Lac Minerals v. Corona Mining). This would imply that the trust only arises at the time of the court order. The Supreme Court was faced the question of when the trust arose, in the context of co-habitational property disputes, in Rawluck. The trust arises at the time that the facts occur that give rise to it. Moreover, the test for constructive trusts in unjust enrichment (Peter v. Beblow) makes no overt claim of discretion. Smith: Maybe it is a mistake to think that there is one explanation that links all constructive trusts. A trust arises out of a particular

property and that any obligation in relation to particular property, the story of equity, is that that obligation has effects on third parties. The only different between trusts arising by operation of law and express trusts is the source of the obligation. The obligations may arise by: A wrong (Soulos) An unjust enrichment (Peter) Other sources (Mountney)42 Unjust enrichment is not the only thing that creates trusts by operation of law. It is a trust, because the obligation, arose by operation of law.

You will find a diversity of explanations of how trusts arising by operation of law arose. As obligations have lots of sources, so do trusts (note that some common law obligations are voluntary and some are not). If constructive trusts arise out of obligations, they are born at the moment of the obligation, not at the moment of the court order. The

42

In Mountney v. Trahern, the court orders the husband to transfer his interest in the matrimonial home to his wife. The order does not create a constructive trust. The husband goes bankrupt. The obligation in respect of certain property makes the constructive trust.

function of the court is to declare the existence of the trust. Hence, there is priority in bankruptcy Perhaps there should be some discretion, a real choice, as to when to find that the constructive trust comes into being. In cases like Soulos, the claim to the asset is a discretionary claim. If the language of injunction was used, it could provide clarity. The plaintiff is asking for an order that the particular property be transferred. This is a discretionary remedy, and we could expect that a judge, asked to exercise that discretion in cases like Soulos where there is every reason to favour the plaintiff, but not to do so in cases, where third party rights are at stake. The logic of equity is that if Peter was unjustly enriched in relation of the house, Beblow should get the house. Peter has an obligation, but it is not clear that it is in relation to a particular property. Therefore, we could have understood that case in the sense of an injunction. The discretion comes in to award the house, but the court could consider other factors including who wants the house. There may still be room for discretion, implemented through the language of injunction. Perfecting Intentions Inter Vivos Transfers 1. Wrongdoing: The courts may construe trusts for gains acquired in breach of confidence, from crime, or in breach fiduciary obligation (Soulos, Lac Minerals). Fiduciary duties exist: in trusts, agents in certain cases, parents, doctors, and lawyers. They can arise in other situations. But when?43

43

Judges have been more willing to listen to these cases. Plaintiffs get a longer litigation period, may get better remedies, and these obligations are easy to breach it because of the no-conflict and no-profit rule. See note 28 There is a presumptive breach of the duty, when the fiduciary enters the conflict zone. The fiduciary exercises the power, but it did so in the wrong way. There may be proper motives but it does not matter if there is a conflict or profit. These strict rules tend to dominate since presumptively, the rules are plaintiff-friendly. Perhaps the courts should reverse the burden of proof.

Justice Wilson articulated a test in Frame v. Smith that explains when a fiduciary is owed: a. The fiduciary can exercise power over the beneficiary, b. That power can be used to damage the beneficiary, and c. The beneficiary is vulnerable. The problem with this test, however, is it is over-inclusive. Consider a line of credit. If the debtor cannot find another bank, if the bank demands the loan, it fits the three criteria. This just describes features, without looking at justification for fiduciary relationships. In Hodgkinson v. Simms, the investment was a good objective investment. However, the stockbroker made a profit from the investment. The investment crashed, but purely because of market conditions. In terms of duty of care, the recommendation was not prima facie negligent. The plaintiff won the case and he recovered his loss. Perhaps the court will find a fiduciary duty when the fiduciary undertakes to act in the interests of another. What about the parent-child relationships or relationships like those in Fox v. Fox? Professor Smith: AUTONOMY TRANSPLANT THEORY if powers are given (by consent or by law), it might be for the benefit of the holder of the power, or not. If the benefit is for the other person, you must act as if it held the power itself. Therefore, a fiduciary obligation is attached to any power if we conclude that the holder held the power for the benefit of another. We seem to be going back to the line of credit problem: how do we keep this from being over-inclusive. The remedy is such that the court treats the defendant as having breached a core duty. Legal acts are voidable. Alternatively, the beneficiary can claim loss resulting or profit acquired by the fiduciary. 2. Detrimental reliance: The courts have used the constructive trust to correct situations in which the plaintiff has detrimentally relied upon an agreement with

the defendant for the acquisition of a property interest (Banner Homes Group v. Luff Developments).

3. Contracts of sale:44
In these cases, there are an intention to transfer property via contract (and not via gift, Re Rose). The vendor holds the property on constructive trust for the purchaser at the moment that the valid contract forms (Lysaght v. Edwards). Normally, the transfer of property goes through without problems; however, something may go wrong, and therefore equity treats the contract as having transferred the beneficial interest to the purchaser, subject to an equitable lien for the payment price in favour of the vendor (reciprocal protection). It is the purchasers obligation to insure the property against harm. The vendor still retains possession and profits, but it is under and obligation to maintain the property so as not to adversely affect the purchasers interest in it. This also works for the transfer/creation of interests less than the transferors (i.e. leases, mortgages).

There is a constructive trust that does arise early on, but it does not give the enjoyment/profit to the purchaser not the vendor. The more standard constructive trust arises when payment is made. Once payment is made, the purchaser gets the beneficial interest in the land.

44

The Sale of Goods Act occupies the field in that area. Therefore, there are no constructive trusts in these cases. 45 If payment occurs before conveyance, a full constructive trust arises in favour of the purchaser. The obligation that the vendor has is to convey the property. That obligation turns into a full constructive trust. It was never a promise to make a trust, but it turns into one.

Equity blurs the line: if I make a promise to convey the interest in land and performance is completed on one side equity will treat the beneficial interests having transferred. In Rose, however, it is the other side that has done what it has supposed to do. The constructive trust in Re Rose is not built on an obligation at all. The trouble is, the would be donor, still does not have an obligation to build a trust on. We dont have an independent obligation. It only ought to be done, because the person wanted to make a gift. Nothing in a one-sided transfer that justifies an obligation. Equity treats done, that which ought to be done. This has to be buttressed by an independent ought the contract in cases like in contracts of sale.

4. Oral trusts of land:

These are unenforceable as expressed trusts (Statute of Frauds); however, the court can find a constructive trust to avoid the application of the statute. The Statute must be pleaded to render arguments inadmissible. Equity will not allow a statute to be an instrument of fraud. Consider the following example (Rochefoucauld v. Boustead): The plaintiff owned lands subject to a mortgage. She agreed with the defendant that he would purchase the property at a mortgage sale and hold the title in trust for her. He kept the land for himself. The court held the plaintiff could use parole evidence to prove that the defendant was relying the Statute to avoid having to hold the property in trust for the plaintiff. Consider this example (Bannister v. Bannister). A third party conveys the property to the defendant, on the understanding that the defendant holds the property for the plaintiff. The defendant refuses the conveyance. The third party dies.

No express trust because the transfer is oral. We do not want a resulting trust, because the property will revert to the third partys estate and it may not go to the plaintiff. We want a constructive trust whereby the court fulfills the intent of the third party settlor. The trust perfects the settlors intentions.

This is not based upon wrongdoing/fraud per se, since it arises at the moment of conveyance. The casebook explains that the court will perfect the promise of the constructive trustee. Every other constructive trust is a bare trust. The only term is to hand over the property. Here, the terms of the trust, are the terms that the trust creator wanted (i.e. in Bannister v. Bannister). These cases are also built upon an intention to create a trust. Prof Smith: the doctrine of part performance for contracts of the sale of an interest of land states as follows: Courts have held that the statute does not make the contract void, only unenforceable, When one side has performed, the courts simply disapply the Statute of Frauds, based on the contention that this partial performance provides independent proof of the existence of a bargain, The idea of detrimental reliance is also in issue. The reliance is by the settlor on the trustee, even though it benefits the beneficiary.

The court will not enforce a constructive contract but an express one. Can this apply to trusts? We have same kind of detrimental reliance. The parties will convey the land on an understanding. The transferor cannot get the land back, because it has relied. If we have detrimental reliance, we can set the statute to one side, and the court is in the position to enforce the express trust. Is this justifiable? There may be some room for the statute to operate still. We impose formality to create a cautionary function. The statute intervenes when the settlor/trustee declares himself trustee. The conveyance, however, requires a formal act. If we

think the Statute is imposing a requirement as to evidence, we do not need to worry about this, because part performance might evidence the creation of a trust. 5. Incomplete Gifts: Some constructive trusts arise because the law imposes an obligation that perfects an intention that is not an intention to create a trust. In Re Rose, the court found that once Mr. Rose had done everything possible to make the delivery of the shares to Mrs. Rose, Mr. Rose held the shares on constructive trust, because the court found that the property was sent forward to Mrs. Rose, and not backward to Mr. Rose. The court did not impose the trust because of unjust enrichment. It did so to perfect Mr. Roses intention to complete the gift. The only trust that could be triggered in Re Rose is a constructive trust. It is kind of like an intentional trust, but the court is perfecting the intention to create a gift. 6. Proprietary Estoppel and Co-habitational Property Disputes: Courts can impose constructive trusts to remedy cases of unjust enrichment where one party in a relationship is denied the material benefits of that relationship when it ends. Constructive trust is used a remedy in these situations but it need not be. The court could impose an equitable lien on the property, issue a mandatory injunction for its transfer or make a vesting order, depending on the authority of the court, per a relevant court of justice act. Perfecting Intentions Transfers Upon Death The SECRET TRUST is a mechanism whereby a testator can ask a trustee to hold immovable property for another person, but the beneficiary (and often the trustee) is unknown to others. Wills legislation prevents an express trust from taking effect, but not one that arises by operation of law. The Authors of the Blue Book provide several justifications for enforcement of the secret trust. The trustee is enriched by the title to the property, and therefore, to correct that enrichment, the court

will either result the property back to the estate or construct it forward to the intended beneficiary. It ensures that the trustee cannot merely keep the property out of his own wrongdoing. Thirdly, the court seeks to perfect the testators intention, to ensure that the intended beneficiary receives the property even given the express defect of lack of writing. In a HALF-SECRET TRUST, we find certainty of intention in the will (e.g. I give $5000 to John in trust according to the terms that I have communicated to him). The testator has left the certainty of objects secret. In a FULLY-SECRET TRUST, the will merely leaves the property to one person. The only thing in the will is certainty of subject matter and constitution. This lacks certainty of intention. The fully-secret trust creates a danger of fraud, since the settlor does not use the language of trust in the disposition. This allows people to change their wills without doing so formally in writing. Secrecy is also inconsistent with the publicity of wills. Requirements for a Secret Trust 1. Communication by the testator of the trust, 2. Acceptance by the trustee (silent acceptance suffices), 3. Timeliness a. FST: before death, b. HST: before execution (making) of the will. The case law requires that, if the will is made, and the conversation occurs afterward, the trust is no good (and there is a resulting trust). This distinction seems illogical. Failure to prove the conditions means that the trustee obtains the benefit. Again, the detrimental reliance story is a compelling reason to override the statute. I would leave the money to the trustee in reliance that he/she follow my instructions. Are these express or constructive trusts? Resulting trusts would be a possible solution. The casebook contends that this is a perfectionary constructive trust. We can say, however, that the communication rules show us that we have detrimental reliance,

and the courts will disapply the form rule and enforce the trust that was intended.

The settlor can evade the Wills Act. Although the disposition to the trustee is valid, it fails as an express trust, since the certainty of objects is uncertain. Equity imposes a constructive trust to send the property forward as intended instead of backward to the estate or to the trustee. In Re Hardy, the court determined that the legatees that receive the property of the constructive trust have a fiduciary power, so that they cannot use the legacy for their own benefit. Constructive trustees should not place themselves in a situation where their interests and the interests of the beneficiaries conflict (no-conflict rule, Re Rees). Therefore, the trustees should consider appointments of property to themselves, because they may invite a conflict of interest. In Re Gardner, the court held that even if the secret beneficiary dies before the testator dies, the beneficiarys estate can still receive the money. Although the trust is supposed to take effect at death (when the trust property is constituted), the court held otherwise. The Authors of the Blue Book explain that this case is probably wrongfully decided. Secret trusts may be treated as testamentary dispositions for tax purposes. The executor must pay down the testators debts before it can give out the property. This means that the secret beneficiarys interest is essentially contingent on there being any money left in the estate. Ottaway v. Norman (1971) Ch. Facts: The testator devised his house to Miss Hodges, on agreement that she devise them to his son and daughter-in-law, the plaintiffs. Instead, Miss Hodges left the house to Mr. Norman. Issues: Are the plaintiffs entitled to the house via a valid secret trust? Holding: Yes.

Reasoning: Justice Brightman held that if a will contains a gift which is in terms absolute, clear evidence is needed before the court will assume that the testator did not mean what he said. Mr. Ottaway intended that Miss Hodges should be obliged to dispose of the house in favour of the plaintiffs. She accepted the communication. Rationale: The standard of proof is clear evidence. Note that if the testator increases the amount of the secret trust without informing the trustee then the beneficiaries cannot enforce the increased amount of the trust. Two key differences exist between fully-secret and half-secret trusts. Firstly, the communication requirement is different. Also, the trustee in a failed fully secret trust can keep the property, while the trustee of a half secret trust cannot; it devolves back to the estate in resulting trust. Re Mihalopulos (1956) Alta. Supreme Court Facts: The testators will directed his trustees to pay the remainder of his estate to charities designated among my papers. The trustees found an unsigned document, in Greek, among the testators papers. It was dated the same date as the will, and included charity names; however, two witnesses and the surviving Canadian executor did not know of its existence. Issues: Is the document incorporated in the will? Is there a valid half-secret trust? Holding: No. No. Reasoning: Justice Egbert held that to be incorporated into a will: 1. The will must demonstrate that the document is in existence, 2. The document must be, beyond a doubt, the document in question. No parole evidence is available to help rectify the situation. This ground fails. In addition, Egbert found that the will contemplated a future notification of a trust. This is inconsistent with the rules on halfsecret trusts. The testator must make his intention clear before the

will is drafted.

BREACH OF TRUST What makes a breach? Breach of a term (strict liability) did the fiduciary do what it was supposed to do? The statutes have a power to excuse. A trustee can always apply to the court for directions. The court has the jurisdiction to make a Benjamin Order to protect the trustee in advance of making a decision to appoint.

Breach of the duty of care (prudent man) the trustee makes an authorized investment, but does so imprudently. The prudent investor standard requires the court to look at the whole portfolio. The delegation may be authorized, but the standard for selection and supervision is prudence as well. Breach of the duty of loyalty (no-conflict/profit rules).

Remedies All of the remedies operate through the accounting process. The trustee must account for the trust property. Compensation for beneficiaries is different. Imagine an unlawful disbursement of trust money this can be disallowed in the account. Payment Disbursement Amount ($1000) Balance $4000 $3000 $4000

The beneficiary has a choice as between the personal remedy against the trustee (to restore the equal amount) or the proprietary remedy against the beneficiary. The hard line equity argument finds that as soon as the trustee makes the disbursement, the trustee becomes liable. The obligation to account need not arise from wrongdoing. The beneficiary can ask the trustee to render its accounts and then inspect them. The beneficiary can accept an unlawful item if it results in a gain. The trustee gets reimbursed for any costs associated with the costs. If the trustee no longer has the proceeds, the trustee will have to account for the proceeds. The

beneficiary can cherry-pick among distinct transactions. This rule has changed for losses under recent statutory reforms (for whole investments). Equity refuses to allow the trustee to plead its own wrongdoing so the trustee cannot plead a wrongful gain against a wrongful loss. Imagine that the trustee failed to invest the money such that the following situations occurs and the trustee may be liable. Date 9/21/2005 9/21/2006 Tracing, Following, and Claiming TRACING about recovery of property gone astray. Usually the property in question is different. For example, the trustee takes $1000 and buys a computer, who he gives to his brother. The beneficiaries can claim the computer as trust property. The logic is one of accounting. Even if the trustee does not want the computer in the account the beneficiary can approve of it, so that the computer replaces the $1000. This is about proceeds. FOLLOWING about recovering the actual property. If the trustee disburses a car for $5000, then the beneficiary can follow the car. In the previous story, the beneficiaries could not follow $1000, because the computer seller is probably a good faith purchaser for value. CLAIMING whether the beneficiary traces or follows, the beneficiary must establish a trust interest in the property or the proceeds. The following case is about pointing to trust property to say that it belongs to the beneficiary. The plaintiff is allowed to select the remedy that it would like: 1. The plaintiff can recover the new asset (or a proportionate part thereof, to be now held in trust), or 2. The plaintiff can claim an equitable lien on the new asset to repay the outstanding amount. $1000 $1000 Amount

Foskett v. McKeown (2000) House of Lords Facts: The plaintiffs, investors, gave trust money to the trustee to invest. The trustee used the money to pay 2 (of 5) payments for roughly 10 000 for the policy. The trustee committed suicide. He left the money to his heirs. Issues: Are the investors entitled to a share in the policy? Holding: Yes. Reasoning: Lord Millett held that this is not a causal inquiry. The inquiry is transactional, and not causal. It is the process of identifying new assets that the trustee acquired using the trust money. The beneficiary has the option of recovering a proportionate part of the new asset or it can have a lien against its original deposit. This is the beneficiarys choice.46 The trustee used the trust money to prolong his ability to pay for the life assurance. It was used to conduct the transaction of the life insurance policy. Rationale: Tracing involves a tracking of the transactions of the trust property and the property may change forms. If it does, the plaintiff beneficiaries can take. Critique: Lord Hope of Craighead held that there was no causal link between the payment of the trust money toward the life insurance. The payout of the policy would have occurred on the basis of the first payment. The breaching trustee is always personally liable to the beneficiaries. The more powerful the tracing remedy, the more

46

Tracing involves following money. We have to follow the trust money until the money is squandered. If the trustee buys something with the money, the beneficiary can trace the money to the new item. If the trustee spends the money on beer and popcorn (i.e. fungible goods), then the beneficiary cannot trace the money further.

money it can take out of future creditors, if the trustee is insolvent. The trustee is not allowed to say that it is stealing the property. If we take the specificity requirement to property seriously, we have to ask ourselves whether this is really an express trust anymore? Chambers would say that these are like purchase money resulting trusts the beneficiary never intended that the trustee benefit from the new property. Mixed Substitutions Contributors to mixed substitutions are treated in proportion (pro rata). If one of the contributors is a wrongful contributor (like the trustee itself), the trustee (or his creditors) is not excluded entirely. Only if it evidentiary difficulty arises, then the wrongdoer might lose out. The court will presume that the wrongdoer gets nothing.

1. Clean substitution: $100 of trust money used to open a new

bank account. The $100 is a traceable product, which the beneficiaries can now claim.

2. Mixed substitution: $100 of trust money and $100 of trustees

money is used to open a bank account. Confusion does not destroy a trust interest. The $100 is held on trust.47
47

Recall Hunter v. Moss, we do not know which shares were held in trust. If the trustee in that case had 50 shares, then declared a trust, and then acquired 900 more, then this is a case of mixed substitution. Yet, at the moment of creation, we are still unsure which shares are trust shares. Assume Hunter gives 475 shares to X and to Y. It seems unfair that Moss should be able to get 50 shares back from X or Y. It might seem fairer that X and Y should give back 25 shares. The beneficiaries seemingly have a choice, if X and Y are not good faith purchasers for value. X and Y take

3. Mixture used to buy something else: $100 of trust money and

$100 of trustees money is used to buy a painting. The painting is now worth $1000, and the trustees can claim 50% interest.48 If the plaintiff goes down in value to $120. Against a nonwrongdoer, the contributors would have to share the loss (i.e., the contributors might only get $60). Against the wrongdoer, however, the wrongdoer can demand $100 (personal claim) and secure the claim with an equitable lien over the painting. The effect of the lien is that the $100 claim is secured, and it will follow into bankruptcy. The trustee absorbs the drop in value.

4. Mixing and Withdrawals: $100 of trust money and $100 of

trustees money is used to open a bank account. Later, the trustee withdraws $100 and squanders it. In Re Hallett, the beneficiaries can keep the remaining $100. The rule in Claytons Case, treats the bank account as a series of debts. The rule is: first in, first out.

In Re Oatway, the trustee took $100 and successfully invested the money. The remaining $100 was squandered. The reverse to Re Hallett was true. Adding Re Oatway and Re Hallett, we cannot tell which money was the trustees and which money was the beneficiaries. Claytons case provides one solution, but it seems arbitrary.
subject to pre-existing equitable rights. The beneficiaries could take it all from X or Y or some from each. A donee is not protected. If Hunter sold the shares, Moss could trace back to the proceeds of the sale.
48

The trustees may even be able to claim more, but it will have to use other mechanisms.

The rule, then, is that the innocent contributor gets its property out first. The beneficiaries can change gears, and they can choose which money is theirs. As the wrongdoer, the plaintiff has a choice. 5. The lowest intermediate balance rule Date Deposits pf Trustees Own Money $100 $200 Deposit of Trust Money $400 $450 Withdrawal s Balance

1 2 3 4

$100 $500 $50 $250

On day 4, the trustee becomes insolvent. The $50 balance on the 3rd day is the lowest intermediate balance. The trustees want all of the $250. Yet, the trustees are limited to a proprietary claim to $50 (and a personal claim to $350). The most of the $250 that can be understood to come from the trust money is $50. The court is not going to make up stories. If the $200 was an attempt to settle the money back to the breach, then the beneficiaries can recover that money. This complicates the situation when there are multiple innocent contributors: Date 1 2 3 Deposit of Trust A $5000 Deposit of Trust B $5000 Withdrawal s $2000 Balance $5000 $3000 $8000

Although A an B are innocent, A suffers the loss of the $2000, and therefore can only recover $3000. We have to look at what actually happened. In Re Graphicshoppe, we see the continuation of the lowest intermediate balance rule. Note, that if the withdrawal occurs on the last day, the trusts recover pro rata.

Date 1 2 3 4

Deposit of Trust A $100

Deposit of Trust B $400

Deposi t of Trust C

Withdrawal s

Balance $100 $500 $100 $300

$400 $200

After day 3, Trust A and Trust B share the $100 pro rata. However, after day 4, Trust A and Trust B still share the $100 pro rata and Trust C is entitled to its entire $200 share. Trusts A and B are not allowed to rely on this deposit to recover their trust money. Again, this is a matter of evidence. Liability of Strangers/Claims against Third Parties 1. Proprietary Remedies Tracing allows for remedies against third parties, because the interest is proprietary. The stranger holds the property subject to the defence: good faith purchaser for value without notice, which voids the pre-existing equitable interest, such that the defendants conscience is clear. This is where equitys interest ends. The requirements are as follows: The purchaser must have a legal interest (full legal title); a legal mortgage (they have advanced the loan) can take priority of the trust interest; an equitable mortgage is subordinate to the trust.49

A purchaser is someone who takes otherwise by operation of law. A donee is a purchaser; however, a purchaser must give value, since equity will not assist a volunteer. Value must be

49

An instrument that encumbers property as security for the repayment of a debt. There is no conveyance of the legal interest in the land. The mortgagee can control the deed to the land; if the mortgagee does not register the mortgage, but holds the deed, it prevents the mortgagor from securing another mortgage.

executed. It cannot be a promise to pay. The protection comes from giving value. Nominal consideration is not value. Notice of the pre-existing interest must be actual, imputed, or constructive. Notice is assessed at the time that value was given. The purchaser cannot rely on his lawyer not to tell it that the property was trust property. A purchaser cannot be wilfully blind to the beneficiarys interest.

2. Personal Remedies If the parties do not have the property anymore (tracing not possible or not desirable), third parties may be personally obliged to reconstitute the trust fund. The parties are liable to account as a constructive trustee. We can have liability without any trust property at all! The third party is liable to account as if it is a trustee. This does mean that there is a trust. The concept of account applies to third parties. Therefore, the plaintiff may get to disgorge the defendant of any profits since the compensation is equitable, and based upon the conept of account. There are three instances when this can occur:

1. Knowing assistance in breach of trust This is like the tort of

inducing contract. The liability is for getting mixed up in someone elses breach.

a. The trustees committed a dishonest and fraudulent

breach of trust. This includes the taking of a knowingly wrongful risk resulting in prejudice to the beneficiary (see M & L Travel v. Air Canada). In Royal Brunei v. Tam, a third party can be liable for even a merely

technical breach. This does not appear to be true in Canada.

b. The defendant-assistant had actual knowledge, was

reckless, or was wilfully blind (the mens rea of the defendant; carelessness is not enough).50

2. Knowing receipt of trust property there are two elements:

a. The receipt of the trust property for its own benefit (not receipt as an agent). The stranger does not purport to administer the property for another.

b. Knowledge of the facts that would put a reasonable

person on inquiry as to the trust interests, and not inquiry was made (Citadel General v. Lloyds Bank). This test contemplates lixability for carelessness. Professor Birks said that this should be a case of strict liability because it is a case of unjust enrichment.

3. De facto trustee (de son tort) if a party intermeddles, to

behave as if it was a trustee, the court will treat the party as a trustee. This means that the stranger will be subject to the duty of care and the duty of loyalty. The court may deny liability of the de facto trustee does not have title to the property (Re Barney).

50

The House of Lords said that the trustee had to be dishonest. This is a problem, since the court must assess what the trustee knew.

FUNDAMENTAL PRINCIPLES OF TRUST LAW A person who takes property as a trustee can never have the benefit of it, unless the settlor expressly grants the benefit of it. The resulting trust is an outgrowth of that presumption. In a discretionary trust, there is no need for a gift-over or default, because all of the property must be disposed of by the trustee. In a fiduciary power situation, the fiduciary need not dispose of all of the property to the beneficiaries. A trust absolutely requires trust property, because the trust is a way of holding property. An express trust never fails for the want of a trustee. The court can appoint a trustee. No person can be made to be the trustee of an express trust. Constructive and resulting trusts are always imposed on trustees.