Supreme Court of Canada Orders Estate Trustee to Exercise Discretion to Benefit Beneficiary

The Supreme Court of Canada released its decision in Cowper-Smith v. Morgan, 2017 SCC 61, on December 14, 2017 relating to siblings disputing the entitlement to their mother’s estate.  

As early as 1992, Elizabeth and Arthur Cowper-Smith of Victoria, BC, had made it clear that after their deaths, their property would be divided equally among their three children, Gloria, Max and Nathan.  Shortly before he died in 1992, Arthur explained such intention to his children to avoid family discord.  However, after their father’s death, the children became estranged from each other.  Gloria first fell out with Nathan.  She wrote him letters demanding that he not raise his voice in her mother’s home or entertain “gay males”.  When he went on an overseas trip, Gloria changed the locks to the family home although Nathan’s belongings were still inside.  He broke in but Gloria had the police escort him out.  Nathan eventually moved to Edmonton.

Gloria fell out with Max next.  After his father’s death, Max struggled with financial difficulties and his mental health deteriorated.  He turned to alcohol and drugs.  His marriage fell apart.  Max moved to England.  In 2005, Gloria made it clear to Max that their mother could no longer live on her own.  They began to discuss options for their mother’s care.  Max eventually agreed to give up his life in England and move back to Victoria to care for their mother in the family home.  He only did so after Gloria agreed that Max would be reimbursed for various expenses, have the use of their mother’s car and most importantly be able to live in the house permanently and eventually acquire Gloria’s one-third interest in the house.  That arrangement worked until 2009, when Gloria began to back away from her promises. 

In 2001, when Gloria kicked Nathan out of the property, her mother’s estate planning changed dramatically.  Elizabeth transferred title to the property and all of her investments into joint ownership with Gloria.  Pursuant to a “declaration of trust” Gloria would hold her interest in the house and the investments as bare trustee with Elizabeth as the sole beneficiary and Gloria would be entitled absolutely to both the property and the investments upon her mother’s death.  Elizabeth also executed a new will which appointed Gloria as executor and revoked all previous wills.   Elizabeth revoked this will in 2002 and executed another will, her last.  In this last will, she again named Gloria as executor but this time provided that her estate would be divided equally between her three children.  However, the trust declaration and Gloria’s joint ownership of the property and the investments, if valid, would have assured that Elizabeth’s estate would be virtually devoid of assets.  Those things were not changed.   

Nathan discovered Gloria’s joint ownership of the house in 2005.  Gloria assured him that the arrangement was to simplify the administration of their mother’s estate and that he and Max would still each receive a 1/3 share.  She gave Max the same assurance 4 years later when he learned that Gloria’s name was on title.  Gloria changed her position after their mother’s death when a trust declaration entitling Gloria to Elizabeth’s assets came to light and Gloria announced her plans to put the house, in which Max was still living, on the market.

Max and Nathan sought an order to set aside the trust declaration as a product of Gloria’s undue influence over their mother and declaring that Gloria held the property and the investments in trust for Elizabeth’s estate to be divided equally between the three children in accordance with Elizabeth’s most recent will.  They also claimed on the basis of proprietary estoppel, that Max was entitled to purchase Gloria’s one-third interest in the property.   The brothers succeeded at trial where the trial  judge found that Gloria had not rebutted the presumptions of undue influence and resulting trust, and declared that the property belonged to Elizabeth’s estate.  The British Columbia Court of Appeal unanimous upheld the trial judge’s conclusion with respect to undue influence and resulting trust, but split on proprietary estoppel.  The majority held that since Gloria owned no interest in the property at the time that she made assurances to Max, proprietary estoppel could not arise.  Max appealed on the issue of proprietary estoppel.

The Supreme Court of Canada allowed Max’s appeal.  The majority decision was written by Chief Justice McLachlin, in one of her last decisions as Chief Justice of the Court, Justices Abella, Moldaver, Karakatsanis, Wagner, Gascon and Rowe concurred.  Justices Brown and Cote wrote separate reasons, concurring in the result but dissenting with respect to the remedy.  The Court held that the trial judge did not err in concluding that proprietary estoppel operates to enforce Gloria’s promise. Since ownership at the time the representation or assurance was relied on is not a requirement of proprietary estoppel, the fact that Gloria did not have an interest in the property at the time Max relied on her promise did not negate Gloria’s obligation to keep her promise. 

To establish propriety estoppel, the claimant must establish three things:

1.      a representation or assurance that the claimant expects to enjoy some right or benefit over property;

2.      the claimant must rely on that expectation by doing or refraining from doing something and his reliance must be reasonable in all of the circumstances; and

3.      the claimant must suffer a detriment as a result of his reasonable reliance such that it would be unfair or unjust for the party who made the representation or assurance to go back on her word and insist on her strict legal rights.

In such circumstances, proprietary estoppel attaches to the interest that the claimant has in the property and protects the equity by making the representation or assurance binding.  It is not necessary that the party responsible for the expectation own an interest in the property at the time of the claimant’s reliance.  When that party has or acquires sufficient interest in the property, proprietary estoppel will attached to that interest and protect the equity.

Whether a claimant’s reliance is reasonable in the circumstances, is a question of mixed fact and law.  A trial judge’s determination of that point is, absent, palpable and overriding error, entitled to deference.  However, a claimant who establishes the need for proprietary estoppel is entitled only to the minimum relief necessary to satisfy the equity in his favour and cannot obtain more than he expected.  There must be a proportionality between the remedy and detriment.

The majority held that in this case, both Max and Gloria had clearly understood for well over a decade that Elizabeth’s estate, including the family home, would be divided equally between the three children upon her death.  It was thus sufficiently certain that Gloria would inherit a one-third interest in the property for her assurance to be taken seriously as one on which Max could rely.  There was no basis on which to overturn the trial judge’s conclusion that Max’s reliance was reasonable.  An equity arose in Max’s favour when he reasonably relied to his detriment on the expectation that he would be able to acquire Gloria’s one-third interest in the family home.  That equity could not have been protected by proprietary estoppel at the time it arose because Gloria did not own an interest in the property.  However, proprietary estoppel attached to Gloria’s interest as soon as she obtained it from the estate. 

Gloria as executor could be ordered to transfer a one third interest in the property to each of the estate beneficiaries so that her promise to Max could be fulfilled.  Such a distribution of shares in the property was not contrary to Elizabeth’s intent  and the court had the power to direct Gloria to exercise her discretion as executor in a certain manner.  With respect to remedy, the minimum necessary to satisfy the equity in Max’s favour was an order entitling him to purchase Gloria’s interest in the family home at it fair market value as at the approximate date on which he would reasonably have expected to do so in the first place.

Regards,

Blair

English Court Issues Stand-Alone "Notifcation Injunction"

On April 29, 2016, in the case of Holyoake v. Candy [2016] EWHC 970 (Ch), the England and Wales High Court granted that country's first stand-alone “notification injunction”.  Such an injunction requires a defendant to give notice to the plaintiff or claimant before disposing of or dealing with particular assets.  Previously, notification orders were given as ancillary remedies to freezing orders or Mareva injunctions.  However, in this case, Justice Nugee  of the High Court was willing to grant a notification injunction without the usual combined order preventing the defendants from actually dealing with those assets.

 

The underlying facts related to a loan made by CPC, a company controlled by wealthy English property developers, Nick and Christian Candy, to Mr. Holyoake.  Holyoake alleged an unlawful means conspiracy against CPC and its directors and complained that as a result of being compelled to enter into further disadvantageous agreements, he ultimately repaid over

£37 million to CPC in respect of an initial loan of £12 million.

 

Following concerns that CPC might dissipate assets in order to make enforcement of an order difficult, Holyoake and other claimants applied for a notification injunction.  They did not seek a full freezing (Mareva) injunction on the basis that they were “seeking no more relief than they considered reasonably necessary to protect their position”.  They argued that if they were notified that the defendants were about to enter into a transaction, they could consider at that stage whether to apply for a freezing injunction or to take other protective steps.

 

The judge found that the court did have jurisdiction to grant a stand-alone notification injunction and that the test for such an injunction was the same as a freezing injunction, namely the claimant must show a good arguable case and a risk of dissipation of assets.  Justice Nugee found that there was a good arguable case and gave guidance on the meaning, stating that it was “a case which is more than barely capable of serious argument, and yet not necessarily one which the judge believes to have better than 50 per cent chance of success”. 

In respect of the risk of dissipation of assets, the judge ruled that a claimant must be able to show that there are objective factors from which risk can be inferred.  In this regard, the judge took into account that CPC had an unusually complex and particularly opaque offshore corporate structure.  He also referred to two unexplained high value transactions which could be innocent but, in the absence of an explanation could also be instances of dissipation.  One was a transfer of property from Christian Candy to his wife and the other was a purchase of a £26 million yacht by Nick Candy for his wife.  All in all, these transactions together with CPC’s corporate structure meant, objectively there was a risk of dissipation.  The court granted the notification injunction.

 

English commentators are unsure as to how these stand-alone notification injunctions will be used in the future.  However, in applying for such an injunction, it is clear that the claimant will have to give an undertaking in damages i.e. undertake to the court to compensate the defendant if it is later found that the claimant was not entitled to the relief granted.  In a freezing order, the consequences of a wrongly made order can be extremely wide-ranging and financially disastrous.  However, the scope for serious damages in result of a wrongly made notification injunction is dramatically less serious.  Accordingly, many suggest that in circumstances where claimants are unable to pursue a freezing order due to their inability to give a cross undertaking, they should be able to successfully apply for a notification injunction.


Take note.  These stand-alone notification injunctions may be coming soon to a courthouse near you.

Regards,

Blair

Court of Appeal Upholds Substantial Indemnity Costs Award

In the dog days of summer, cases that one might otherwise ignore, suddenly cry out for attention.  One such case is Matthew Brady Self Storage Corporation v. InStorage Limited Partnership 2014 ONCA858 which deals with the exciting issue of the cost consequences of offers to settle.

 

The principals of Matthew Brady Self Storage Corporation (“Matthew Brady”) jointly purchased with the principal of InStorage Limited Partnership (“InStorage”) a vacant factory in Windsor, Ontario and converted it into a self-storage facility.  InStorage was part of a group of corporations in the business of operating self-storage facilities and had approximately 50 sites in operation at the time.  Matthew Brady was incorporated for the purpose of acquiring and converting the property for the joint venture. 

 

The plans of the joint venture partners were altered when InStorage ran into financial difficulties.  This circumstance led to further negotiations and a new arrangement whereby the principals of Matthew Brady agreed to put up the entire purchase price so that Matthew Brady would become the sole owner of the Windsor property pending completion of the project.  The parties entered into a put/call agreement under which Matthew Brady could force InStorage to purchase the property through a “put” and InStorage could force Matthew Brady to sell the property to it through a “call” beginning one year following substantial completion of the retrofit and for three years after that.  

 

The put/call agreement provided that if the parties could not agree on a purchase price, an appraiser would determine the purchase price and in the absence of a manifest error, the appraiser’s determination of “fair market value” as defined, would bind the parties.  The fair market value definition provided that the primary consideration was to be the net cash flow generated from the property.  Matthew Brady exercised the put.  It obtained an appraisal.  However, InStorage refused to accept the appraiser’s determination of the fair market value of the property, taking the position that he had made a manifest error in failing to base his conclusion about fair market value on the income approach. 

 

Matthew Brady sued.  The trial judge granted a motion by Matthew Brady to exclude the report and evidence of a second appraiser.  In the course of that ruling, the trial judge found that the original appraiser had made no manifest error in arriving at his fair market value conclusion.  The trial judge allowed Matthew Brady’s action.  InStorage appealed to the Ontario Court of Appeal.

 

The Ontario Court of Appeal (consisting of Justices Doherty, Blair and Tulloch) dismissed the appeal holding that the language of the put/call agreement did not require the appraiser to use the income approach.  Instead, he was required to give that approach “primary consideration”.  Ultimately, it was open to the appraiser to determine that the income approach was not helpful.  For the purposes of the appeal, the court assumed that the trial judge should not have made a finding that there was no manifest error in the appraisal in the course of his admissibility ruling, and that he should have given InStorage a full opportunity to address that issue.  However, that error did not result in any prejudice to InStorage, as InStorage would have been unable to establish manifest error in any event. 

 

The Court of Appeal held that the trial judge did not err in granting specific performance of the put/call agreement.  Damages are always an adequate remedy where the vendor is the plaintiff.  However, in this case the vendor was intended to be the defendant.  The parties clearly intended InStorage to be the sole owner of the property.   Matthew Brady had renovated the property to InStorage’s specifications and design criteria.  But for InStorage’s commitment to owning the property, Matthew Brady would not have acquired it and done the retrofit.  InStorage occupied, managed and operated the building since the completion of the retrofit.  The Court of Appeal found that it had done a poor job of managing the property – something that would affect its value and impede a steady sale.   The court held that in such circumstances, damages would not adequately compensate Matthew Brady for InStorage’s refusal to abide by the put/call agreement.

 

Get ready for the kicker.  At the end of the trial, the trial judge made a cost award of $415,000 plus HST in favour of Matthew Brady.  The award was made on a partial indemnity basis to a point that an offer to settle was made by Matthew Brady (and not accepted by InStorage) and on a substantial indemnity basis thereafter.  InStorage submitted that the offer to settle did not qualify as a Rule 49 offer for costs purposes because, although it had been exchanged directly between the parties, it had not been served on InStorage’s lawyers as required by the rules.  The Court of Appeal disagreed. 

 

The Court of Appeal agreed that Matthew Brady’s offer to settle had not been served on InStorage’s lawyers but that fact did not preclude an award of costs on a substantial indemnity basis.  Service of the offer on InStorage did not create any confusion or difficulty and there was no evidence that InStorage’s lawyers were unaware of the offer.  The court held that the trial judge did not err in awarding substantial indemnity costs that exceeded the multiplier in rule 1.03(1) of the Rules of Civil Procedure on the basis that InStorage’s conduct had unnecessarily prolonged the trial. 

Regards,

Blair