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What a Sham! – McGoey (Re)

Introduction

The recent decision of McGoey (Re)[1] concerned the validity of two trust documents put before the court by Mr. McGoey. These trusts purported to hold two properties owned by Mr. McGoey in trust for his children much to the disappointment of his creditors.  Relying on an expert report which demonstrated crucial flaws in the form of these trusts, Justice Penny ruled both trusts were shams and provided a thorough analysis of the meaning of a sham trust.

Mr. McGoey

Mr. McGoey worked in the telecommunications industry. Between 1991 and 2010 he held a series of senior executive positions at several large corporations. Notably, While CEO of Unique Broadband Systems Inc. (“UBS”), UBS acquired 51.06% of Look Communications Inc. (“Look”). Mr. McGoey became CEO and vice chairman of the board of directors of Look in May 2004.

In 2008 Look began experiencing financial difficulties. Look decided to proceed by way of a plan of arrangement that consisted of a court-supervised auction for the sale of all assets. Mr. McGoey and the board accepted an offer of $80 million along with compensation awards to directors and officers of the company. Mr. McGoey in particular, was awarded approximately $5.6 million. This became the subject of subsequent litigation concerning a breach of Mr. McGoey’s fiduciary duties owed to Look. Facing criticism from shareholders, Mr. McGoey resigned from his positions at Look and UBS.

Following a trial, Mr. McGoey was found to have liable to repay the sum of

$5,565,696.00 to Look.  Shortly thereafter, Mr. McGoey was bankrupt. The Trustee of Mr. McGoey’s bankrupt estate sought to realize on Mr. McGoey’s assets in order to satisfy his creditors.

The Properties and Corresponding Trusts  

In 1994, Mr. and Mrs. McGoey purchased a cottage in Muskoka for $700,000.00 as joint tenants. There was a vendor take back mortgage which was ultimately replaced by financing form the Bank of Montreal. In July 1998, a charge of $1.12 million was granted to the Bank of Montreal. That charge remains on title.

In 2003, Mr. and Mrs. McGoey purchased a farm in Caledon for $635,000.00 as joint tenants. Many charges were placed on title in favour of the Bank of Montreal.

Mr. McGoey insisted that his interest in these two properties were held in trust for his children. As evidence, Mr. McGoey relied on two trust documents alleged to have been created in 1995 for the Muskoka property and 2004 for the farm property. Both documents similarly declared that the properties were not marital assets and were held in trust for Mr. McGoey’s children.

Are the Trusts a Sham?

A sham is a transaction or instrumented designated to give the appearance of creating legal rights or obligations that are different from what the party actually intended to create. In the context of a trust, a sham trust is usually created for a fraudulent, deceitful or illegal purpose such as avoiding a creditor.[2]

Whether a trust is invalid as the result of a sham depends on the intention that existed at the time that the alleged trust was made. Absent clear and cogent evidence of the settlor’s intention to create a trust, it may be set aside as a sham. [3] Intention to create a trust is one of the three certainties require to create a valid trust. The absence of the settlor’s intention to create a valid trust means that it is void.[4]

The evidence in this case demonstrated that both trusts were shams. Relying on the expert report of Thomas W. Phinney who specializes in design in typography, it was determined that the typeface used in the Muskoka property trust January 4, 1995, was set in a font called Cambria. This font, however, did not exist prior to 2002.[5]

Similarly, the typeface used in the farm property trust dated March 4, 2004, was set in a font called Calibri. Like Cambria, this font was also developed in 2002 but was not available to the general public until 2007.[6]

Mr. Phinney’s report left no doubt that the trust documents did not exist on and were not signed on the dates indicated. Rather, it is likely that these documents did not come into existence until 2007.[7]

Upon making this determination, Justice Penny went on to say that this conclusion alone did not indicate that these trusts were a sham. Whether a purported trust is a sham must be assessed in all of the circumstances. Simply because the trusts could not have been created on the purported dates did not mean that the trusts created by Mr. McGoey were illegitimate.[8]

The common law has developed a non-exhaustive list of “red flags” which require the party asserting the trust to explain their conduct. Notably, in this case the trusts were not registered on title to the properties, there was no evidence that Mr. McGoey ever mentioned the existence of the trust to anybody until many years after it was allegedly created and nothing distinguished the use of the property by Mr. Mcgoey from that of an owner.[9]

Conclusion

In this case, Mr. McGoey could offer no explanation with respect to his conduct with the properties as well as the issue of the typeface in the trust documents. This led to the obvious conclusion that the trusts were shams and therefore void.

[1] 2019 ONSC 80.

[2] Ibid at para 19.

[3] Ibid at para 20.

[4] Ibid at para 21.

[5] Ibid at para 25.

[6] Ibid at para 26.

[7] Ibid at para 39.

[8] Ibid at para 40.

[9] Ibid at paras 41-44.

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