Tag: Trustee Liability
Acting as a Trustee is not only an onerous task but comes with a significant exposure to personal liability.
A trust can be established where three certainties are present: (a) certainty of intention – the Trustee knows that he or she will hold property for the benefit of another; (b) certainty of the subject matter – the property to be held by the Trustee is clearly identified; and (c) certain of objects – the beneficiary of the trust is clearly established.
In Ahmed v. Ibrahim, 2016 ONSC 6430 (ONSC Div. Court), the mother of the plaintiff (Amina) received a settlement payment from a motor vehicle accident. The settlement funds totalling $27,335.03 were deposited into Amal’s bank account. At the time of the deposit, Amal had $19,656.00 in her account. Upon receiving the settlement funds and on Amina’s request, Amal transferred the balance of her bank account (i.e. $46,996.03) to her mother. Amina in turn transferred the funds to a bank account owned by Mohamed (the “Trust Funds”). Believing the Trust Funds belonged to Amina, Mohamed agreed to hold the funds in trust. When Amal demanded her share of the Trust Funds, Mohamed advised that he had already disbursed all of the Trust Funds to Amina in accordance with Amina’s instructions.
Amal sued Mohamed and Amina. At trial, Amina argued that the Trust Funds belonged solely to her and that Amal had no entitlement to the Trust Funds. Amal, however, presented sufficient evidence to show that $19,656.00 of the Trust Funds belonged to her and that none of the funds disbursed by Mohamed had been used for her (Amal’s) benefit. It was Mohamed’s evidence that he believed the Trust Funds belonged solely to Amina and that, in any event, Amina told him the Trust Funds withdrawn by him were used for Amal’s benefit. The judge preferred Amal’s version of the events over Amina and ordered Mohamed, to pay $19,656.00 to Amal.
On appeal Mohamed argued that the trial judge’s decision against him should be reversed because he acted properly in withdrawing the funds, on Amina’s instructions, because he believed the Trust Funds belonged to solely to Amina. In upholding the trial judge’s decision, the Divisional Court held that the trial judge’s findings of fact were owed deference since he had the opportunity to assess the credibility of the parties and accordingly the decision should stand.
This decision is a good example of how easily a trust can be created and a Trustee can attract personal liability even when acting honestly upon mistaken facts.
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When a trustee breaches his or her fiduciary duties, there are various remedies available to the beneficiaries. For instance, if a trustee makes an unlawful disbursement of trust funds and these funds are traceable, there may be a proprietary remedy. In other cases, when the funds are not recoverable, the beneficiaries may have recourse to a personal remedy against the trustee.
These types of claims are most often channeled through the obligation to account. In requiring a trustee to provide a full and complete accounting, the beneficiaries are able to review transactions and determine whether any of them go beyond the trustee’s parameters. This is why a trustee must always be prepared to provide records and account details if requested by the beneficiaries.
In reviewing a trustee’s accounts, the beneficiaries are accorded with a great deal of discretion with respect to accepting or rejecting any unlawful transactions. For instance, if a trustee breaches his or her fiduciary duty by engaging in an unlawful act which results in a financial loss, the beneficiaries can disallow the disbursement and it will not form part of the trust accounts. They can then seek a remedy to have the missing funds replaced – either through tracing or by the trustee personally. This may occur in a situation where a trustee uses trust funds to make an imprudent investment that s/he did not have the authority to make. If the investment does not succeed, the beneficiaries can strike it from the accounts.
Alternatively, if the same investment results in a profitable outcome, the beneficiaries can choose to adopt the act and reap the benefits, notwithstanding the fact that the initial act itself was unlawful. In this case, the proceeds of the transaction are treated as trust property or if the trustee no longer has the funds, he or she can be required to restore the value of the proceeds to the trust.
This mechanism provides the beneficiaries with the best of both worlds. Even if there is one profitable act and another that is not (resulting in the trust assets breaking even by cancelling one another out), the beneficiaries can choose to adopt the profitable act and disallow the other. This can cause a windfall gain in some situations. The fact that the beneficiaries have this choice showcases that the law in this area can be very beneficiary-oriented.
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When a trustee has breached his or her fiduciary obligations, the beneficiaries have access to a wide variety of potential remedies. However, a challenge arises when the person who improperly deals with the trust assets is effectively a stranger to the trust.
There are two types of remedies that can be applied in this latter scenario. The first is a proprietary remedy which requires that the trust property (or a traceable substitute) is being held. As long as the trust interest can be traced, it will subsist through the transfer of property. The only person against whom it cannot be claimed is a bona fide purchaser for value without notice.
The second type of remedy is personal in nature. If the third party is not a trustee, it can be difficult to attribute personal liability. To rectify this problem, the third party can be designated by the courts as a constructive trustee.
It is important to note that a constructive trustee is not the same as a trustee of a constructive trust; the most significant difference being that if a third party is found liable as a constructive trustee, he or she can be found to be personally liable. In contrast, if a constructive trust is found, the third party simply holds the property in trust for the beneficiaries. (Waters’ Law of Trusts in Canada, 4th Ed at 11.II)
According to the rule stated in Barnes v Addy (1873–74) LR 9 Ch App 244, there are generally three circumstances in which a third party can be found to be liable as a constructive trustee. These are:
Dishonest Assistance – This is a situation in which a third party assists the actual trustee in committing a breach or trust. In this sense, a legal fiction is created whereby the third party is designated as constructive trustee in order to impose a personal remedy. The standard here can be somewhat subjective but it typically requires actual dishonesty. Although carelessness may be a factor, the third party should have knowingly and intentionally taken part in the breach for the designation of constructive trustee to apply (Air Canada v M & L Travel).
Knowing Receipt of Trust Property – This situation arises when a third party accepts trust property from the trustee knowing that the funds are being given in breach of trust. This has been viewed by the Supreme Court of Canada in Citadel v Lloyds Bank as being akin to unjust enrichment claims with restitution being the appropriate remedy. However, the English courts have viewed it more as an equitable wrong such as conversion where the remedy is one of compensation or disgorgement.
Trustee de son Tort – This finding arises when a third party is essentially acting as the trustee (i.e. the constructive trustee) with all of the duties and obligations that this entails.
The concept of the constructive trustee has stepped in to create a remedy for situations in which a third party is responsible for a breach of trust. Despite not having a fiduciary duty to the beneficiaries, the courts have been generally unwilling to allow these individuals to escape liability and as a result, have shown that the obligations of a trustee may nonetheless be imposed upon a third party under certain circumstances.
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