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The Doctrine of Unconscionable Procurement: Gefen v. Gaertner

 Gefen v. Gaertner, 2019 ONSC 6015  (CanLII), http://canlii.ca/t/j30w4 [1]

Introduction

The doctrine of Unconscionable Procurement was used in this case in the context of an older vulnerable adult, to set aside transactions that amounted to her being divested of her wealth, where the court was of the opinion that the older adult did not have a full appreciation of the facts underlying the rationale for those transactions.

In this family dispute, one of the sons claimed unconscionable procurement to set aside transactions and gifts that his elderly mother had entered into with her other son, which benefited him and his immediate family, however, divested her of her wealth.

The expert report and testimony of Dr. Shulman, a Geriatric Psychiatrist, was relied upon by the parties’ opposing the allegations that the transactions were unconscionably procured, to show that the elderly mother had capacity and was able to understand and appreciate the nature of the transactions she had entered into.

Family background[2]

Elias and Henia Gefen were holocaust survivors from Poland. They immigrated to Canada in 1951. They started their life in Canada with very little means; however, they accumulated significant wealth, through their hard work and investing in real estate.

They were married for 65 years and the couple had three children together, namely: Harvey, Harry, and Yehuda.

Elias and Henia were very generous with each of their sons. Henia was disappointed with their two younger sons (Harry and Yehuda), regarding their work ethics and their expectations for financial support. However, Henia was pleased with their son Harvey. She was appreciative and grateful for Harvey’s loyalty to her and his support and work in connection with the management of the commercial real estate holdings that comprised a big part of the Gefen Family Assets.

Elias became sick and was hospitalized at Baycrest.

The three sons were not close to each other. However, prior to Elias’ death, Harry and Yehuda became aligned in their views about Harvey, and were concerned about how Henia would treat them after Elias’ death. As a result, the family unit was split into two factions: Harry and Yehuda against Harvey and Henia.

Many issues arose between the two factions of the family while Elias was dying in hospital, which caused litigation to ensue.

Elias had remained at Baycrest until he passed away on October 28, 2011. Yehuda passed away in May of 2016, during the course of litigation.

The trial was scheduled for 14 days; however, it was completed in 29 days. There had been over 60 pre-trial motions related to this proceeding.[3]

The issues at trial

There were various issues at trial that had to be determined. The issues that were abandoned prior to trial or that the court considered and dismissed will not be addressed here. We will focus on Harry and Yehuda’s claim against Harvey for unconscionable procurement and for a declaration that the transactions by which assets and benefits were transferred to Harvey and his daughter Ashley Gefen be unwound, and that they be held in trust for Henia (the “unconscionable procurement claim”).[4]

Background regarding the significant transfer of wealth[5]

Henia made significant inter vivos gifts to, and bestowed significant benefits upon, Harvey and his family from 2011 onwards, in the sum of approximately $25.26 million.

Harvey produced an unwitnessed typed document dated June 27, 2011, in which Henia purports to give to Harvey her “half” or share of all mortgage proceeds received or to be received in respect of the managed assets and of all bank accounts (the “June 27 document”). Although Henia did not recall this document and was unable to identify it, she was assessed and found to be aware of and have capacity to make significant gifts and contracts and conveyances benefitting Harvey and his daughter Ashley in 2012 and 2014.

In April of 2012, Henia signed a collection of documents prepared by a solicitor, Nestor Wolicki (who was Harvey’s former lawyer and high school classmate) in which she agreed to compensate Harvey for past property management services in respect of the managed assets (the “Compensation Agreement”, dated April 24, 2012), for future property management services in respect of the managed assets (the “Services Agreement”, dated April 24, 2012) and to forgive all past indebtedness owing by Harvey to Elias and Henia. At the same time (and in the following year as well), Henia purported to confirm and secure significant past debts said to be owing by Henia to Harvey under the Compensation Agreement and otherwise, and future debts that may come due under the Services Agreement, through Promissory Notes, Guarantees and Postponement of Claims, General Security Agreements, Demand Debentures and Authorizations to Register Mortgages (the “Security Documents”).

The Compensation Agreement and Services Agreement were considered by Dr. Shulman in a capacity assessment he undertook of Henia in 2012, in which Henia’s capacity to enter into these agreements with Harvey was confirmed.  However, the Security Documents were not provided to or considered by him.

Beyond the Services Agreement, the Compensation Agreement and related Documents that Henia signed in April of 2012 (and again in 2013) that significantly benefitted Harvey, since Elias’ death, Henia made significant conveyances and transfers of interests in the Gefen family commercial real estate holdings to Harvey and his daughter Ashley.

In 2014, Dr. Shulman was again asked to undertake a capacity assessment of Henia, specifically with respect to the gifts made to Harvey and Ashley of one-half of Henia’s share of the commercial real estate holdings.

THE COURT’S CONSIDERATIONS

The Court referenced case law and John E.S. Poyser’s book on Capacity and Undue influence when considering the elements of the doctrine of unconscionable procurement.

It considered how the doctrine renders a wealth transfer transaction voidable, not void, that normal equitable defences apply, that the onus rests on the party attacking the transaction to prove on a balance of probabilities as to whether the transaction was unconscionably procured, and If there has been a significant wealth transfer made in favour of a recipient who has been active in procuring it, it is prima facie unconscionable under this doctrine.[6]

The question to be determined by the Court

The Court had to determine whether Henia intended to bestow significant benefits on Harvey and Ashley and whether she fully appreciated the effect, nature, and consequence of so doing.[7]

Standing of Harry to invoke the Doctrine

Harvey alleged that only Henia (or her estate) had standing to complain about any alleged unconscionable procurement that would amount to an “equitable fraud” upon her. Counsel for Henia also argued that this doctrine could not be applied where the donor was alive and had not been declared incompetent.

Harry pointed to authority where a potential beneficiary can advance a claim for unconscionable procurement in a case where the donor was still alive.[8]

The Court noted, that although the authority used by Harry was an old authority, the other parties did not provide other authority that established that this doctrine could only be advanced by the donor of the gift (or her estate if the donor was no longer alive).

The Court stated that this “… is an equitable doctrine that is intended to protect vulnerable persons from others who might procure their assets away. It is logical that, in a circumstance where the vulnerable person is still alive, their vulnerability could prevent them from advancing such a claim.”[9] Harry was given standing to pursue this claim.

The Gefen Family Assets

The Court looked at the nature and scope of the Gefen Family Assets, which provided important context for the consideration of the unconscionable procurement claim as the doctrine applies only where the wealth transfer is significant or improvident.

When Elias died, the Gefen Family Assets included various corporate real estate holdings that Harvey managed.[10]

No formal valuations or agreed values of the interests held by Elias and Henia in those properties were presented at trial, but there were estimates, provided by Henia (in the context of a capacity assessment in 2012 that her real estate holdings were at that time worth approximately $30 million) and by Yehuda (in the context of his application for dependent’s support, that the Gefen Family Assets were valued in the range of $60 million and could be as high as $100 million).[11]

The Gefen Family Assets also included cash. Henia estimated it when she met with Dr. Shulman for a second capacity assessment in 2014 that the residue of her estate (not including the interests in commercial properties) was worth approximately $4 million in cash.

The Presumption of Unconscionable Procurement

The Court determined that the basic elements to raise the presumption of unconscionable procurement in respect of the transactions had been established, as Harvey was actively involved in the arrangements for and documentation of these transactions by which Henia conferred significant benefits on Harvey and his immediate family members. By these transactions, Henia had divested herself of at least half of her significant net worth and had confirmed indebtedness to Harvey secured by her remaining assets, in favour of Harvey.[12]

Evidence to Rebut the Presumption of Unconscionable Procurement

Harvey and Henia maintained that the evidence of Henia’s knowledge, understandings, wishes and capacity, recorded by Dr. Shulman in his 2012 and 2014 notes and capacity assessments, was persuasive evidence that Henia did appreciate the nature, effect and consequences of the identified contracts, gifts, transfers and conveyances.

The Court noted Dr. Shulman’s opinion, when he testified that Henia was able to talk at length about contracts she was planning to sign with Harvey to compensate him for past and future property management services, about the gifts she planned to give to Harvey and Ashley in 2012 and she was able to name the properties specifically. She did the same in 2014 when Dr. Shulman assessed her for a second time. Dr. Shulman was satisfied that the rationale for the gifts was very clear in Henia’s mind.

Dr. Shulman had further concluded that Henia understood the nature and objects of her bounty, that she was not someone who was particularly susceptible or vulnerable to influence, although he acknowledged that the question of whether she had been unduly influenced by Harvey in respect of these transactions was not a medical question but was rather a legal question. Dr. Shulman was of the opinion was that Henia was capable of making substantial monetary gifts to Harvey and Ashley, as she wished to do. The court stated that this goes to the question of whether the gift was valid but does not determine the question of whether it is voidable under the doctrine of unconscionable procurement. [13]

However, the Court stated that:

“…the ultimate determination of the reliability of the statements Henia made to Dr. Shulman, and his assessment of her capacity and understanding of the significant transactions that she was entering into with Harvey and Ashley at the time, is in part a function of whether both Henia and Dr. Shulman had a full appreciation of the facts underlying the rationale for those transactions.”[14]

The Court had accepted that there was a theme in what Henia appeared to be seeking to accomplish in the transactions with Harvey and his family. Henia wanted to reward Harvey for his hard work and loyalty out of “her” half of the Gefen Family Assets. What she appeared to have done was to gift “her” half of their commercial real estate holdings to Harvey and his family. However, it seemed that she went further than this by her forgiveness of past debts owing by Harvey, and her acknowledgement of debts said to be “owing” to Harvey for significant additional amounts that were secured by the remainder of her assets (the other half). These transactions are significant. Absent justification, they are presumptively imprudent.”[15]

The Court looked at each of the corresponding documents, the rationale given by Henia to Dr. Shulman for entering into the transactions during her assessments, to determine whether both Henia and Dr. Shulman had a full appreciation of the facts underlying the rationale for those transactions.

The 2012 Contracts for Harvey’s Property Management Services and Debt Forgiveness

In 2012, Henia explained to Dr. Shulman that she wanted to reward Harvey for his loyalty and hard work over the years. She felt that Harvey was entitled to compensation for his past property management services and felt that it was worth approximately $1 million.  She also advised him that she was forgiving loans that had been made to Harvey valued at approximately the same amount and that she was discharging the security that had been taken over Harvey’s interests in other properties in respect of that indebtedness.

The Court accepted Henia’s forgiveness of Harvey’s debts and the discharge of security he had provided in the context of Henia’s bona fide desire to compensate Harvey for his past property management services.

The presumption of unconscionable procurement was rebutted with respect to the forgiven loans.

The Compensation Agreement and Security Documents

In respect to the Compensation Agreement that Henia signed and the corresponding Security Documents, she wanted to compensate Harvey for his past property management services, as she was under the impression that he had not been compensated for his services in the past, however, this was untrue. Furthermore, Dr. Shulman was not furnished with the Security Documents that was the subject of the assessment regarding Henia’s capacity to sign it. The Court concluded that “Dr. Shulman’s assessment of Henia could not be relied upon to rebut the presumption of unconscionable procurement that arose under the circumstances where he was missing evidence”. The Court declared the Compensation Agreement and Security documents in favour of Harvey void.

The Services Agreement and Management Fees post – 2011

It had come to the Court’s attention that Harvey had been paid the sum of $2 million for his services by the real estate holding company between 2009 – 2016, until he was replaced with a professional property management company by the Estate Trustee During Litigation.  Additionally, Harvey had also received payment by way of the Services Agreement, a copy of which was not provided to Dr. Shulman when he conducted Henia’s assessment regarding her capacity to enter into that transaction.

The Court determined that, to the extent that the Services Agreement and the Management fees signed by Henia, purports to put a burden of additional compensation, it was not rationalized, and the Court was not willing to accept that Henia appreciated the nature, effect, and consequences of the Agreement.

The Court concluded that “Dr. Shulman’s assessment of Henia could not be relied upon to rebut the presumption of unconscionable procurement that arose under the circumstances where he was missing evidence”. The Court declared Services Agreement void.

The 2013 and 2014 Conveyances of Interest in the commercial properties to Harvey and Ashley[16]

The Court found that the conveyances to Ashley and Harvey of Henia’s “half” of the commercial real estate holdings valued approximately at $15 million to be consistent with Henia’s theme of wanting to give “her” half to Harvey and his family.

Those conveyances were discussed and rationalized with Dr. Shulman, initially in 2012 regarding the intended gifts to Ashley, and subsequently in 2014 regarding the gifts she had made of interests in these properties to both Ashley and Harvey.

The rationale for the gifts to Ashley was confirmed in the trial testimony of both Henia and Ashley about Henia’s desire to provide a gift to a grandchild with whom she had a good relationship, of whom she was proud, and her desire to provide a source of financial assistance to Ashley, and through her to her disabled brother.

The Court found that the presumption of unconscionable procurement was rebutted in respect of these conveyances.

Receipts by Harvey of Henia’s Funds[17]

Dr. Shulman was not advised of or asked to provide assessment about any cash gifts or transfers or receipts of Henia’s funds to Harvey. He was not made aware of any such payments being made to Harvey and had not been able to provide any insight as to the rationale for such a significant divestiture, in contrast with the very considered assessment that Dr. Shulman undertook regarding Henia’s conveyances of interests in the commercial properties to Harvey and Ashley.

Furthermore, Henia was unable to recall the unwitnessed June 27, 2011 document purporting to gift her “half” of the funds in the bank account and anticipated mortgage proceeds from the managed property in the approximate sum of $3.18 million to Harvey.

The Court was not satisfied that Henia appreciated the nature, extent, or consequences of such a significant divestiture of cash flow, particularly in the context of the other transactions that she undertook and which have been rationalized. It ordered that any such funds so received be returned to Henia.

TAKEAWAY

Lawyers should be mindful when requesting capacity assessments of their client to furnish all the relevant documentation and facts to the assessor, in order for the assessor to furnish a wholesome report.

[1] Gefen v. Gaertner, 2019 ONSC 6015  (CanLII), <http://canlii.ca/t/j30w4>. [“Gefen”]

[2] [“Gefen”] at Paras 4-8.

[3] Ibid at para 10.

[4] Supra note 1 at para 9.b.iii of.

[5] Ibid at paras 48-52.

[6] Supra note 1 at paras 158 to 164.

[7] Kinsella v. Pask, 1913 Carswell 781, 12D.L.R.522, (ONT. C.A.) at para 23

[8] Lavin v Lavin (1880), 27Gr. 567 (Ont.Ch.), affirmed (1882), 7 O.A.R 197 (C.A).

[9] Supra note 1 at para 167

[10] Supra note 1 at para 172.

[11] Footnote 36 of [“Gefen”].

[12] Supra note 1 at para 180.

[13] Supra note 1 at para184.

[14] Supra note 1 at para188.

[15] Supra note 1 at para189.

[16] Supra note 1 at paras 211-212.

[17] Supra note 1 at paras 213-219.

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