Banton v. CIBC Trust Corporation et al. [Indexed as: Banton v. CIBC Trust Corp.]

53 O.R. (3d) 567

[2001] O.J. No. 1023

Docket Nos. C32760 and C33490

Court of Appeal for Ontario

Morden, Charron and Borins JJ.A.

March 23, 2001

• Application for leave to appeal to the Supreme Court of Canada dismissed September 6, 2001 (L'Heureux-Dubé, Arbour and LeBel JJ.). S.C.C. File No. 28587. S.C.C. Bulletin, 2001, p. 1528.

Trusts and trustees--Breach of trust--Trustees transferred trust property to settlor under mistake of law--Motions judge correctly found that deceased's estate was liable to return trust property to trust--Equities not equal as between trust and estate--Fraud or dishonesty not required in order to characterize deceased's receipt of trust fund as wrongful --Deceased knew or should have known that trustees acted in breach of terms of trust in making transfer to him--Estate unjustly enriched by receipt of trust property at expense of beneficiaries of trust.

In 1987, the deceased gave a continuing power of attorney with respect to all of his property to his sons. The deceased subsequently executed a will naming his five children as the remainder beneficiaries. In 1992, the deceased transferred title to his residence to the sons in trust ("the residence trust"). Under the terms of the trust, the sons agreed to "utilize the subject property or the proceeds of the sale of the subject property for the maintenance and support of [the deceased and his wife] in the event the same is required" and confirmed that they held the property or the proceeds from the sale of the property in trust for the deceased's five children. In 1993, after the deceased moved into a retirement home, the trustees sold the residence for $205,342.63 and transferred the sale proceeds to the deceased. After his wife died, the deceased formed a close friendship with a 31-year-old waitress, MB. The sons became concerned about this relationship, and used their power of attorney to transfer the deceased's assets to an inter vivos trust. The deceased was to be the sole beneficiary of the income and capital during his lifetime and his five children were to be the ultimate capital beneficiaries. The deceased married MB two days later.

On a motion by MB, the motions judge held that the residence trust was entitled to recover the $205,342.63 which the trustees, in breach of the terms of the trust, transferred to the deceased in 1993, and that the residence trust's claim was to be secured by an equitable lien. MB appealed.

Held, the appeal should be dismissed.

The motions judge did not err in holding that the residence trust was entitled to the return of the proceeds of sale of the residence because, as between the estate and the trust, the equities were not equal, since the deceased had wrongly mingled the funds from the trust with his funds. The motions judge correctly found that the transfer was made by the sons under a mistake of law. The respondents did not have to show fraud or dishonesty on the part of the deceased in order to have his receipt of the trust fund characterized as wrongful. It was sufficient if it was shown that he knew, or should have known, that the trustees were acting in breach of the terms of the trust in making the transfer to him. It was open to the motions judge to conclude that the deceased, who was settlor of the trust in question, at least should have known of the breach of trust. The governing principle in this case was the prevention of unjust enrichment. There was no reason why the estate, which had been enriched by the receipt of property transferred to the deceased in breach of trust at the expense of the beneficiaries of the trust, should not be compelled to restore the property or its value to the trust. There was no evidence of a change of position by the deceased as a result of the payment to him. The case, in its simplest form, was one of a transferee of trust property, with notice of the breach of trust, being liable to restore to the beneficiaries the trust funds received.

APPEAL from the orders of Cullity J. (1999), 1999 14887 (ON SC), 30 E.T.R. (2d) 148, 182 D.L.R. (4th) 486 (Ont. S.C.J.) and (1999), 30 E.T.R. (2d) 138 (Ont. Gen. Div.) with respect to a trust.

Law Society of Upper Canada v. Toronto Dominion Bank (1998), 1998 4774 (ON CA), 42 O.R. (3d) 257, 169 D.L.R. (4th) 353, 44 B.L.R. (2d) 72 (C.A.) [Leave to appeal to S.C.C. refused (1999), 250 N.R. 194n], distd Other cases referred to Diplock Estate, Re; Diplock v. Wintle, [1948] Ch. 465, [1948] 2 All E.R. 318, [1948] L.J.R. 1670, 92 Sol. Jo. 409, 484, affd [1951] A.C. 251, [1950] 2 All E.R. 1137, 66 (Pt. 2) T.L.R. 1015, 94 Sol. Jo. 777 (H.L.) (sub nom. Ministry of Health v. Simpson, Re Diplock, Minister of Health v. Simpson) Statutes referred to Mental Health Act, R.S.O. 1990, c. M.7 Succession Law Reform Act, R.S.O. 1990, c. S.26, ss. 45, 46 Authorities referred to Fridman, G.H.L., Restitution, 2d ed. (Toronto: Carswell, 1992) Maddaugh, P.D. and J.D. McCamus, The Law of Restitution (Aurora, Ont.: Canada Law Book, 1990) Oosterhoff, A.H. and E.E. Gillese, Text, Commentary and Cases on Trusts, 5th ed. (Toronto: Carswell, 1998) Scott, The Law of Trusts, 4th ed. Smith, The Law of Tracing (1997)

Michael S. Deverett, for appellant. Joel E. Shaw, for respondents Victor Leonard Banton, George Raymond Banton, Joan Madeline McFater, Patricia Kathleen Heaps and Sheila Lynn McKenzie.

The judgment of the court was delivered by

[1] MORDEN J.A.:-- Muna Banton, the applicant in this proceeding, appeals in separate appeals from two orders made by Cullity J. The first, dated August 6, 1999, ordered that "the Residence Trust and its trustees are not liable to pay, or reimburse any expenses for the maintenance and support of George Banton Sr. or Lily Banton whether paid by them or by the Public Guardian Trustee." The second, dated December 15, 1999, ordered that "of the remaining funds held by CIBC Trust Corporation, an amount of $205,342.63 is payable to the Trustees of the Residence Trust subject to the amounts, if any, to be paid out of the Residence Trust pursuant to paragraphs 3 and 7 of the Order of this Court dated August 6, 1999".

[2] The history of this matter is somewhat complicated but, fortunately, much of it is not relevant to the resolution of the particular issues raised on the two appeals before the court. This history, in the main, is set forth in the reasons for judgment of Cullity J. given on August 25, 1998 (reported at 1999 14887 (ON SC), 182 D.L.R. (4th) 486) following a nine-day trial. No appeal was taken from this judgment.

[3] Cullity J. decided several issues in this judgment, among them: (1) that the deceased, George Banton, did not have testamentary capacity when he signed wills dated December 21, 1994 and May 4, 1995; (2) that the making of these wills was procured by the undue influence of Muna Banton; and (3) that the deceased had capacity to enter into a marriage with Muna Banton and that the marriage was valid. It followed from this that the deceased died intestate and that Muna Banton, as his widow, would be entitled to a preferential share of $200,000 and one third of the residue under the Succession Law Reform Act, R.S.O. 1990, c. S.26, ss. 45 and 46. Cullity J. also held that a trust created in 1994, which was not the Residence Trust (see para. 12 of these reasons), was invalid. This holding is set forth in para. 4 of the judgment which is set forth in the next paragraph.

[4] The overall issue on these appeals is whether the estate includes the assets of what is called the Residence Trust [See Note 1 at end of document]. With respect to this question, the judgment given on August 25, 1998 provided in paras. 4 and 10 as follows:

4. THIS COURST [sic] ADJUDGES AND DECLARES that the Trust Indenture dated December 15, 1994 is invalid (the "1994 Trust"), that the capital interest in the 1994 Trust is part of the estate of the deceased, but the said estate does not include the proceeds of the sale of the deceased's house at Coral Cove Crescent, North York, Ontario and the investment thereof, to the extent that the said proceeds and investment (the "Residence Trust") can be traced to the 1994 Trust. The amount of said investment shall be determined as provided in paragraph 10 below.

5. THE COURT ADJUDGES AND DECLARES THAT Mr. Justice Cullity shall remain seized for the purpose of dealing with any motions for directions relating to the determination of any compensation that may be awarded to CIBC Trust Corporation, the division of assets between the Residence Trust and the estate, the disbursement of the Funds by CIBC Trust Corporation to the trustees of the Residence Trust and the estate trustee, and, if all parties agree, to his retention of jurisdiction for the purpose of appointing an estate trustee.

[5] Muna Banton brought the motion provided for in this judgment and it resulted in the two orders under appeal. Cullity J.'s reasons for these orders are reported at 1999 14887 (ON SC), 182 D.L.R. (4th) 486. The report of these reasons, as with those reported in 1998 7154 (ON CA), 164 D.L.R. (4th) 129, enables me to adopt the statements of fact in them by reference and I do so. For convenience, however, I repeat the following facts.

[6] George Banton, who was born on June 13, 1906, married three times. The respondents on this appeal, Victor Leonard Banton, George Raymond Banton, Joan Madeline McFater, Patricia Kathleen Heaps and Sheila Lynn McKenzie, are the children of his first marriage with Kathleen who died in 1970. In 1971, he married Kathleen's sister, Lily.

[7] On October 30, 1987, George Banton gave a continuing power of attorney with respect to all of his property to his sons Victor and George Jr. On January 30, 1991, he executed a will in which he directed $25,000 be set aside for the care and maintenance of Lily only if and after her own funds were exhausted. His five children were the remainder beneficiaries.

[8] On or about January 16, 1992, George Banton transferred title to his residence to Victor and George Jr. in trust. The terms of this trust, the Residence Trust, are the subject of the first issue raised on this appeal. I set forth the operative part of the document in full:

ACKNOWLEDGEMENT AND AGREEMENT

TO : GEORGE AND LILY BANTON

AND TO : MURRAY P. HARRINGTON, their solicitor herein

RE: Transfer of Property

22 Coral Cove Crescent

North York, Ontario

THE UNDERSIGNED, GEORGE BANTON, hereby authorizes and directs you to engross the Transfer/Deed of Land herein as follows:

BANTON, Victor Leonard--in trust (d.o.b. May 24, 1941)

BANTON, George Raymond--in trust (d.o.b. May 19, 1938)

and this shall be your good and sufficient authority for doing so.

AND THE UNDERSIGNED, VICTOR LEONARD BANTON and GEORGE RAYMOND BANTON, acknowledge and confirm as follows:

1. that they agree to utilize the subject property or the proceeds of the sale of the subject property for the maintenance and support of George and Lily Banton in the event the same is required.

2. that they hold the property or in the alternative, the proceeds from the sale of such property, in Trust for the five children of George Banton after the death of George and Lily Banton.

DATED at Scarborough, Ontario this 16th day of January 1992.

[9] After George Banton had moved into a retirement home in July 1993, the trustees sold the residence at 22 Coral Crescent in October 1993 for $205,342.63 and they transferred the sale proceeds to George Banton. The correct legal characterization of this transfer is an important matter in this appeal.

[10] Lily died in June 1994. George Banton formed a friendship, which quickly developed into a close attachment, with Muna Banton who was a waitress in the restaurant of the retirement home where George Banton was living. She was 31 years of age.

[11] During the last three months of 1994, George Banton's children became increasingly concerned about his relationship with Muna Banton. In November 1994, a doctor expressed the opinion that George Banton was financially incompetent and issued a Certificate of Incompetence under the Mental Health Act [R.S.O. 1990, c. M.7]. The doctor was not called as a witness at the trial and her opinion was not relied upon by the respondents for the purpose of these proceedings.

[12] On or about December 15, 1994, the Banton sons used their power of attorney to transfer his assets of $430,000 to an irrevocable inter vivos trust under which Victor and George Jr. and CIBC Trust Corporation would be the trustees, George Banton would be the sole beneficiary of the income and capital during his lifetime, and his children, and substitutionally, their issue would be the ultimate capital beneficiaries.

[13] On December 17, 1994, George Banton and Muna were married. On December 21, 1994, George Banton executed a will giving his estate to Muna, with a gift over to the Salvation Army in the event of her prior death. George Banton died on February 14, 1996.

The Interpretation of the Residence Trust Terms

[14] The first issue which I shall address relates to the decision dated August 6, 1999 that the Residence Trust and its trustees are not liable to pay, or reimburse any expenses for the maintenance and support of George Banton Sr. or Lily Banton. Cullity J.'s reasons for this decision are set forth in paras. 7-12 of his reasons reported at 1999 14887 (ON SC), 182 D.L.R. (4th) 486. It is sufficient to say that I agree completely with these reasons. Cullity J. held that the more natural meaning of the words "in the event the same is required" in the Residence Trust document was "that the thing is needed" and not, as contended by Muna Banton, "when demanded".

[15] In addition to saying that I agree with Cullity J.'s reasons on this issue, I would note that there is no evidence that the deceased or Lily Banton made any demand for maintenance and support from the Residence Trust. This may be an indication of the settlor's view of the meaning of the trust document, a view that accords with Cullity J.'s decision. Further, Muna Banton did not produce any bills for the support and maintenance of George or Lily Banton which had gone unpaid.

The Nature and Extent of the Residence Trust's Claim to Recover its Assets

[16] The second issue relates to whether the Residence Trust is entitled to recover the $205,342.63 which the trustees, in breach of the terms of the trust, transferred to the deceased in October 1993. All of the assets involved in this appeal, those of the estate and those of the trust, were held by CIBC Trust Corporation to be dealt with in accordance with orders made in this proceeding. We were informed on the hearing of the appeal that they have now been paid into court under an order of Greer J. As far as the nature of the Residence Trust's entitlement is concerned, I note that Cullity J. in his reasons held that its claim for the $205,342.63 was to be secured by an equitable lien. This should be reflected in the formal order that I set forth in para. 1 of these reasons.

[17] The evidence on the amounts involved is somewhat fragmentary. The following is a rough outline of it. When the trust funds of $205,342.63 were transferred to George Banton in October of 1993, they were added to his funds which then amounted to about $225,000. The amount that was transferred to CIBC Trust Corporation in December of 1995 (the 1994 trust) was about $430,000. The remainder interest in this trust was set aside by para. 4 in the August 25, 1998 judgment. The total amount of the assets involved on December 31, 1999, George Banton's (the estate's) and the trust's assets, was said to be $272,523.19. This was after $200,463.18 fixed by Cullity J. for costs had been paid out of the estate's portion of the fund as ordered in the judgment of August 25, 1998. The amount paid into court was $256,000.

[18] From the foregoing it may be seen that the total amount of the commingled fund grew from $430,000, when the deceased received the funds from the trust, to $472,986.37 before the costs of $200,463.18 were paid. Because these costs were to be paid entirely from the estate's interest in the fund by virtue of the judgment of August 25, 1998, it would appear that there was no shortfall in the fund that would make it necessary for the trust to claim proprietary relief in order to recover the full amount of the claim. This was not argued before us, possibly for good reason [See Note 2 at end of document]. In what follows I shall address the submissions that were made.

[19] Cullity J.'s reasons for holding that the Residence Trust was entitled to an equitable lien to secure its claim for the restoration of the $205,342.63 are, in the main, set forth in para. 28 of the August 6, 1999 reasons reported at 1999 14887 (ON SC), 182 D.L.R. (4th) 486 and in paras. 8-27 of the December 15, 1999 reasons reported at 182 D.L.R. (4th) 486. In essence, he held that the trust was entitled to the return of the $205,342.63 secured by an equitable lien on the assets held by the CIBC Trust Corporation because, as between the estate and the trust, the equities were not equal. This was because George Banton had wrongly mingled the funds from the trust with his funds. The appellant submits that Cullity J. should have dismissed outright the trust's claim for proprietary relief or, alternately, the trust should have been granted only a pro rata share in it.

[20] I shall address, first, threshold submissions made by the parties. The appellant submitted that because Cullity J. had not referred to George Banton as a "wrongdoer" in the course of his reasons dated August 25, 1998, following the trial, there was no basis for his doing so in the later reasons. The answer to this is that in the August 6, 1999 and December 15, 1999 reasons, it was necessary for him, in dealing with the submissions made to him relating to the competing claims to the fund, to characterize the conduct of the parties, but it was not necessary for him to do so in the earlier reasons.

[21] The respondents' threshold submission was that the question of the Residence Trust's entitlement to be paid from the fund in priority to the estate's claim was decided in the August 25, 1998 judgment and was, therefore, res judicata. The terms of the August 25, 1998 judgment, paras. 4 and 10, set forth above, do not support this argument. Paragraph 4 provides that "the said estate does not include [the Residence Trust] to the extent that [the Residence Trust] can be traced to the 1994 Trust." So, clearly, the nature and extent of the trust's interest in the overall fund was a matter to be decided. This is confirmed by para. 10 in the judgment and, of course, by Cullity J.'s proceeding to deal with the motions which culminated in his orders of August 6, 1999 and December 15, 1999.

[22] The appellant's first submission, which counsel acknowledged to reflect an "extreme" position, is that the Residence Trust should not be entitled to any tracing remedy with respect to the moneys in the fund. This submission, apparently, was not made to Cullity J. It is based on George Banton's "innocence" in receiving the funds and the intention of George Jr. and Victor to give them to him. I deal with the "innocence" of George Banton in the next part of these reasons. The allegation that the trust funds were given to George Banton is contrary to the finding of Cullity J. which was that the transfer was made by the sons under a mistake of law. I agree with this finding. I might note that, if the transfer was a gift and if the beneficiary daughters were bound by it as well as their trustee-beneficiary brothers, the trust would have no claim at all, personal or proprietary. I shall say no more on this submission.

[23] The appellant's basic submission is that the fund should be divided pro rata in accordance with the respective "contributions" to it when the $205,342.63 was transferred to George Banton in October 1993 -- as opposed to Cullity J.'s conclusion that the trust had a secured entitlement to $205,342.63 in the fund. In support of this submission, the appellant relies on Law Society of Upper Canada v. Toronto Dominion Bank (1998), 1998 4774 (ON CA), 42 O.R. (3d) 257, 169 D.L.R. (4th) 353 (C.A.) which held that the fund in question in that case should be apportioned pro rata among the claimants. To obtain the benefit of this decision, the appellant would be required to show that the equities as between the estate and the trust are equal. The appellant submits that Cullity J. erred in characterizing George Banton's conduct in receiving the funds as wrongful because there was nothing wrongful or dishonest involved in this receipt.

[24] The respondents do not have to show fraud or dishonesty in order to have George Banton's receipt of the trust fund characterized as wrongful. It is sufficient if it is shown that he knew, or should have known, that the trustees were acting in breach of the terms of the trust in making the transfer to him: Scott, The Law of Trusts, 4th ed., subsections 288, 292, 296 and 297. "[A]n act may amount to a legal or equitable wrong even where the actor is unaware that he is infringing another's rights": Smith, The Law of Tracing (1997) at p. 88. On the facts of this case, it was clearly open to Cullity J. to conclude that George Banton, who was settlor of the trust in question, at least should have known of the breach of trust. See Note 3 at end of document]

[25] The appellant has submitted that if George Banton should have known that the transfer was a breach of trust then the two trustees, Victor Banton and George Banton Jr., should also have known and that this should prevent the Residence Trust from making full recovery of the amount transferred. It is difficult to appreciate how the three beneficiaries who were not trustees, the sisters, could be affected by this submission but, in any event, on principle, I do not think it should have any effect. Cullity J., who heard the evidence relating to the transfer, characterized what the trustees had done as a "mistake of law" and said that it should not be a barrier to the recovery of their shares. Further, the appellant's notice of motion (paras. 15 and 17) which led to the order in question characterized the transfer as "mistaken".

[26] The appellant appears to overlook that the governing principle is the prevention of unjust enrichment. Why should the estate, which has been enriched by the receipt of property transferred to the deceased in breach of trust at the expense of the beneficiaries of the trust, not be compelled to restore the property or its value to the trust? Cullity J. noted that there was no evidence of change of position by George Banton as a result of the payment to him. Accordingly, the equities are not equal between the estate and Residence Trust and Cullity J. was right in distinguishing Law Society of Upper Canada v. Toronto Dominion Bank and granting priority to the trust, securing its claim by granting an equitable lien.

[27] The case, in its simplest form, is one of a transferee of trust property, with notice of the breach of trust, being liable to restore to the beneficiaries the trust funds received: Scott, op. cit., subsection 288.

[28] In the result, I would dismiss each of these appeals with costs to be assessed as those of one appeal payable out of the estate funds.

Appeal dismissed.

Notes

Note 1: The appellant on the appeal from the December 15, 1999 order sought, in her factum, to set aside an order declaring that certain expenses paid by Victor Banton in the amount of $7,784.50 were a debt of the estate. This issue was not raised in the argument before us. In my view, the order of Cullity J. on this point was soundly based and should not be disturbed.

Note 2: Oosterhoff and Gillese, Text, Commentary and Cases on Trusts, 5th ed. (Toronto: Carswell, 1998) at p. 753 says that one of the advantages of proprietary remedies is that "they carry interest, if the property is income-producing, from the date that the defendant acquired the property, whereas personal claims such as for an accounting, only carry interest if it is claimed, at the pre-judgment interest rate, from the date the cause of action arose to the date of the order."

Note 3: It was not argued that, even if he were not a wrongdoer, the deceased as a tranferee who paid no value for the trust property would be bound by the trust. "Now, of course, it is well-settled law that where a trustee in breach of trust transfers trust property to a person who pays no value for the property, the transferee takes subject to the trust, even though he had no notice of the breach of trust or of the existence of the trust. ... The truth clearly is that the innocent donee takes subject to the trust, even though he has no notice of the trust, because he would otherwise be unjustly enriched at the expense of the beneficiaries as a result of the violation by the trustee of his duty to them." Scott, op. cit. subsection 289. "If a trustee in breach of trust gives trust money to a donee, the fact that the donee spends the money before he has notice of the trust is ordinarily no defense. It is sufficient if the beneficiaries of the trust show that the money was paid in breach of trust and that no considersation was given for it. If this is shown, the donee is called upon to account for the amount which he receives. To be relieved of liability, the donee must show that before he had notice of the breach of trust he so changed his position that it would be inequitable to hold him liable. The mere fact that he has spent the money is not a defense." Scott, op. cit. subsection 292.2. Re Diplock Estate; Diplock v. Wintle, [1948] Ch. 465, [1948] 2 All E.R. 318, which treated innocent volunteer charities which had received funds in breach of trust on the same footing as the trust beneficiaries, muddies the waters on this question. See Fridman, Restitution, 2d ed. (1992) at p. 433 and Maddaugh and McCamus, The Law of Resitition (Aurora, Ont: Canada Law Book, 1990) at pp. 157-58.