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How Do You Become a Trustee?

The above question was the central issue in Greenlight Solutions Corp v Baker.[1] In it the court considered whether the defendant lawyer impliedly accepted a trust. This is not an issue that arises every day but is clearly an important one. The court also considered whether a lawyer’s professional obligations may assist in determining whether a lawyer is liable in such circumstances.

Of course, in most cases you only become a trustee if you accept the office. And you cannot be compelled to accept it. Abrioux JA, who delivered the judgment of the Court of Appeal, explained why this is so in the following words, and it is useful to be reminded of these basic principles:

32      Reduced to its essentials, a trust is a legal relationship wherein a trustee holds and administers property for the benefit of beneficiaries or objects of the trust. Its hallmark is the trustee’s fiduciary duty toward the beneficiaries or objects. This duty carries important responsibilities, including abiding by the terms of the trust; acting honestly and with skill and prudence; and not personally profiting from dealings with trust property or the beneficiaries. Falling short of these responsibilities may expose trustees to personal liability, not merely for losses that were foreseeable or caused by their own delicts, but for any missing property that, but for the breach, ought to have been in the trust. Liability is therefore strict and, potentially, severe. A finding that one is a trustee can result in significant legal consequences.[2]

33      The law therefore does not lightly bestow the title of trustee. In express trusts, trustees — whether actual or constructive — cannot be appointed by others unilaterally. As the authors explain in Mark R. Gillen, D.W.M. Waters, Lionel D. Smith, Waters’ Law of Trusts in Canada:[3]

No person can be compelled to accept the office of trustee. In the great majority of cases, therefore, whether the trust is contained in a will, any other instrument, or in an oral declaration, the settlor will seek the consent of the would-be trustee before appointment . . .

No such consent was obtained in this case,  but the plaintiff argued that the defendant was nonetheless a trustee. These are the salient facts.

In 2019 Innasmat Lynx Inc. (‘Lynx’) agreed to lend Green Light Solutions Corp. (‘Green Light’) 3 million USD. The agreement required Green Light topay a 30,000 USD deposit to Lynx’s lawyer, the appellant Gordon Baker ‘in trust’, subject to certain conditions. It the conditions were met the amount would be applied toward insurance costs. If they were not met, the amount would be refunded. The conditions were not met, and Green Light demanded a refund of the moneys. Lynx did not refund them. Green Light then sued Lynx, as well as Baker for breach of trust. Lynx failed to defend and default judgment was entered against it. It failed to pay the judgment. In 2020, Green Light and Baker brought competing applications for summary judgment. The application judge found that the circumstances of the case made Baker into a trustee for Green Light and granted Green Light’s application.[4] Baker appealed.

Baker was not involved in any way with the negotiations for or the drafting of the loan agreement and was not initially aware of it until he was told by an officer of Lynx that he would be receiving funds from Green Light into its trust account. Baker made no inquiries about the moneys, except to ask ‘whether there was any hold on the funds’. He was told that there was not. The funds were deposited into his trust account. Then he received instructions from Lynx to transfer the moneys into two Lynx accounts. Green Light did not give any instructions to Baker or demand any undertakings from him when it wired the funds to him. The wire transfer also did not indicate that the funds were being paid in trust.

The basis of Green Light’s claim was breach of trust. It did not allege that Baker owed it a duty of care under the principle of a lawyer’s duty to a non-client.

Abrioux JA noted that there were potentially three ways in Baker could have been held liable as a trustee: (1) his implied acceptance to become a trustee; (2) becoming trustee de son tort; or (3) ‘knowing assistance’ in a third party’s breach of trust. The ‘knowing receipt’ approach was unavailable since Baker never received the moneys for his own benefit.

His Honour noted that the first way, implied acceptance, may arise based on the defendant’s conduct (a) if he deals with trust property for reasons that cannot clearly be linked to any other purpose; (b) if he exercises any act of ownership over the property; or (c) if he actively interferes in the affairs of the trust.

The second way, trustee de son tort, arises when the defendant, though never appointed as trustee, acts as if he has been and purports to administer the trust property for the benefit of the beneficiaries.[5] In that case the law will treat him as a trustee. In other words, he is a constructive trustee.

The third way, knowing assistance, arises when the defendant knowingly assists trustees who engage in a dishonest or fraudulent act. Someone who knowingly assists a trustee in committing a dishonest or fraudulent act is not a trustee, and the remedy for knowing assistance is normally personal, either in the form of compensation, or by disgorgement of the participant’s gain. However, a proprietary remedy is possible in appropriate cases.[6]

His Honour disposed of the second and third ways summarily. With respect to the second, Baker did not become a trustee de son tort because he never purported to act as trustee for Green Light. With respect to the third way, there was no factual basis on which Baker could be found liable for knowing assistance.

His Honour discussed the first way, implied acceptance, in detail. To that end he considered Royal Bank of Canada v Fogler Rubinoff.[7] In that case the law firm received funds from the Royal Bank on behalf of a client who was negotiating a share purchase agreement. The firm suggested that, as a gesture of good will, the client deposit $180,000 into its trust account to be applied to the purchase price if the agreement was concluded. The bank issued the draft ‘in trust’ and the client explained the nature of the draft to the firm. During the negotiations, a dispute arose between the firm and the client, and, over the client’s objections, the firm disbursed $100,000 from its trust account to pay its legal fees and paid the remainder to the client. The bank sued the firm for breach of trust. The Court of Appeal held that the firm was aware of the trust in favour of the bank. Therefore, if it was unsure about the terms of the trust, it had a legal duty to make inquiries of the bank. It did not do so but since it had constructive notice of the trust, it breached the trust by disbursing the moneys in a way that was inconsistent with the trust.

Abrioux JA distinguished Fogler Rubinoff, because Baker was unaware of the trust, having been initially unaware of the loan agreement that created a trust. All he did was receive the funds into his trust account  and then disburse them in accordance with his client’s instructions. He acted as agent for his client. The mere fact that the funds were deposited into his trust account was insufficient to impute knowledge to him that the funds were impressed with a trust.

His Honour noted that the question whether Baker had professional obligations to make further inquiries when he received the funds was not a necessary element to the claim. But he made an important point in this connection. In his opinion, breach by a party of his professional obligations may assist the court’s analysis in determining whether the party is liable. However, inquiries required by professional standards cannot, by themselves, serve to impute knowledge of a trust, for that would in effect result in the unilateral appointment of trustees. In support of this view, and because Baker practiced in Ontario, his Honour quoted the commentary to Rule 7.2-11 of  the Ontario Rules of Professional Conduct and noted that it shows that professional obligations in a trust context involve mutuality. Clearly, it takes two to create a trust.

[1]    2021 BCCA 287, 71 ETR 4th 1.

[2]    Internal citations omitted.

[3]    4th ed. (Toronto: Carswell, 2012) at 883. The identical quotation can be found in the 5th edition (Toronto: Thomson Reuters, 2021) at 934.

[4]    Green Light Solutions Corp v Baker 2020 BCSC 1812.

[5]    The term ‘trustee de son tort’ is not particularly illuminating. For that reason, Lord Millett once suggested, ‘[s]ubstituting dog Latin for bastard French, we would do better to describe such persons as de facto trustees: Dubai Aluminium Company Ltd v Salaam, [2003] 2 AC 366 (HL) at 403.

[6]    See further Oosterhoff on Trusts, 9th ed by Albert H Oosterhoff, Robert Chambers, and Mitchell McInnes (Toronto: Thomson Reuters, 2019), §18.4.6.

[7]    (1991) 5 OR 3d 734 (CA).


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