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Ademption By Conversion: Best v Hendry

Best v Hendry, 2021 NLCA 43, 71 ETR 4th 174[1]

A specific testamentary gift is a gift of an identifiable property that the testator has described with sufficient particularity to distinguish it from her general estate. Thus, a devise of Blackacre is a specific gift. So is a bequest of ‘my Maserati automobile’. In contrast, a legacy of $1,000 is not a specific but a general gift. Specific gifts are subject to the doctrine of ademption

When a testator leaves a specific gift under her will to a named beneficiary, but the property that is the subject matter of the gift no longer exists at her death, the gift, apart from statutory amendments, adeems. The underlying reason for this is that a testator can only dispose of property that he owns at death and although he once owned the property in question, he now no longer owns it. The law assumes that the testator did not intend to give the beneficiary the value of the property, but that he intended to revoke the gift. Thus, the specific gift fails.

The reasons why the property is no longer in the estate are various. The testator may have sold the property or given it away, it may have been lost or stolen, it may have been expropriated, and it may have destroyed.

The doctrine of ademption often attracts the equitable doctrine of conversion.[2] When a testator has devised or bequeathed specific property but sells or otherwise disposes of it before death, he has converted it into other property and the gift adeems. That kind of conversion is not equitable conversion but an actual conversion that happens at common law. Equitable conversion occurs when the testator has not yet disposed of the property but has entered into a specifically enforceable agreement to sell it.[3] When he dies the property is therefore still in the estate but, apart from remedial statutory provisions, the gift will nonetheless adeem. That is because equity, which deems that as done which ought to be done, takes the view that there has been a notional or equitable conversion of the property into another kind of property.

Suppose that a testator devised Blackacre to his daughter Mary and directed that the balance of his property be divided equally among his other three children. Then, in 2021, he entered into an installment contract to sell Blackacre. Under the contract the purchaser pays $50,000 upfront and agrees to pay the balance in specified amounts over a 10-year period with interest. The testator dies in 2022, when most of money remains owing under the agreement. Equity deems the gift of Blackacre to have adeemed and therefore Mary takes nothing under the will. Unfair? Yes, on the face of it, but the result is simply an application of the doctrine of ademption and equitable conversion. And thus, as Mignault J noted in Re Church,[4] from which I have adapted the above facts, ‘Dura lex, it is true, sed lex’.[5] The problem could, of course, easily have been avoided if the testator had made a substitute gift to the effect that if he sold the property before he died, Mary would be entitled to the sale price from the residue of the estate.

The equitable doctrine of conversion also applies to other property interests, such as options, but that is an issue that can be explored another day.[6]

On occasion a testator will instead direct that a specific property be sold, and the proceeds paid to a beneficiary. In that case the gift of the proceeds is still specific.[7] If the testator sells the property himself and then dies, it may be possible to trace the proceeds into an account into which they have been paid, so long as they have not been commingled with other moneys.[8] If they have been commingled, there has been such a change in name and form that the property which was the subject matter of the specific gift no longer exists.[9] On the other hand, if the testator took back a charge for part of the purchase price, the proceeds are then still identifiable to that extent and the beneficiaries can recover their gifts out of the mortgage.[10]

Moreover, if the property that is the subject matter of the specific gift merely changes in name and form, there will be no ademption.[11] This happens, for example, if a testator bequeaths ‘my 500 shares in ABC Ltd’ and ABC Ltd reorganizes its capital by splitting its stock two for one, so that the testator then owns 1,000 shares. If she still owns them on her death, the beneficiary will be entitled to the 1,000 shares.[12]

On the assumption that the testator did not intend ademption to occur when the property that was given no longer exists, some provinces have enacted legislation that avoids it, at least in part. For example, s. 20(2) of the Succession Law Reform Act[13] provides:

(2) Except when a contrary intention appears by the will, where a testator at the time of his or her death,

(a) has a right, chose in action or equitable estate or interest that was created by a contract respecting a conveyance of, or other act relating to, property that was the subject of a devise or bequest, made before or after the making of a will;

(b) has a right to receive the proceeds of a policy of insurance covering loss of or damage to property that was the subject of a devise or bequest, whether the loss or damage occurred before or after the making of the will;

(c) has a right to receive compensation for the expropriation of property that was the subject of a devise or bequest, whether the expropriation occurred before or after the making of the will; or

(d) has a mortgage, charge or other security interest in property that was the subject of a devise or bequest, taken by the testator on the sale of such property, whether such mortgage, charge or other security interest was taken before or after the making of the will,

the devisee or donee of that property takes the right, chose in action, equitable estate or interest, right to insurance proceeds or compensation, or mortgage, charge or other security interest of the testator.[14]

Ontario has also enacted an anti-ademption provision in its substitute decisions legislation. It provides that if an attorney disposes of the property that is the subject of a specific gift, the beneficiary’s interest is transferred to the proceeds, and he is entitled to receive the value from the residue of the estate.[15]

Having now got the law and the general principles out of the way, I turn finally to an examination of Best v Hendry. The facts of the case are rather bizarre, but in the end, I believe that the majority of the Court of Appeal reached the right decision. The testator made her will in 1981. In it she devised and bequeathed her home and contents to her niece Marie and the residue to Marie’s sister Kathy. She appointed the drafting solicitor her executor. In 2007 the testator was diagnosed with dementia and moved into a care home. Kathy was granted Letters of Guardianship of her estate in 2008 with the consent of Marie. The sisters prepared the house for sale and Kathy sold it in 2008. She deposited the proceeds into the testator’s bank account where they were commingled with the other moneys in the account. The testator died in 2011 and the solicitor obtained letters probate.

The solicitor then met with the sisters. He told them that the testator intended to leave the bulk of her estate to Marie, that he was able to identify the funds in the bank account that derived from the proceeds of sale, and that he proposed to pay the amount of the proceeds to Marie and the residue to Kathy. This meant that Kathy would get only about one-fifth of what Marie would receive. The sisters then discussed that advice and, to avoid the delay and expense of getting independent legal advice, Marie proposed that she would pay Kathy $40,000 from the moneys she would receive from the solicitor. When the sisters then met with the solicitor, they did not mention their private arrangement to him. He presented them with a release which absolved him from any further obligation. They signed the release.

Marie never paid the $40,000 to Kathy. Kathy then brought this action, naming Marie as first defendant and the solicitor as second defendant. She claimed that Marie owed her the moneys given to Marie by the solicitor and that the solicitor breached his duty of care to her and was negligent in carrying out his duty. She claimed damages from both defendants. The solicitor brought a contributory negligence claim against Kathy and a third party claim against Marie. The trial judge dismissed Kathy’s claims against both defendants and held that the doctrine of ademption should not apply in this case because: (1) the intended beneficiary (Marie) would be deprived of any benefit from the estate if the doctrine were applied; (2) the property that was the subject matter of the specific gift was not disposed of by the testator, but by another beneficiary (Kathy) who would benefit if the gift were adeemed; and (3) the proceeds could still be found in the estate and were available for distribution. Kathy appealed. LR Hoegg JA wrote the majority decision with which FP O’Brien JA concurred. GD Butler JA also concurred in the disposition of the appeal.

LR Hoegg JA discussed the law governing the duties of executors and trustees, the interpretation of wills, and the law of ademption by conversion at length, and her Honour considered a large number of cases, including several of the cases mentioned above. She held that since the will did not contain a substitute gift in the event the testator did not own the house when she died, the gift to Marie adeemed. Moreover, the solicitor’s evidence that he believed the testator wanted to leave the bulk of her estate to Marie was inadmissible. Further, contrary to what the solicitor believed, the proceeds of sale could not be traced into the bank account, because the testator did not bequeath the proceeds of sale but devised the house instead.[16] Consequently, the trial judge erred in failing to apply the doctrine of ademption.

Her Honour went on to hold that the solicitor breached his duty as executor and trustee in failing to recognize that the specific gift to Marie had adeemed, to pay the funds in the bank account to Kathy, and to advise the beneficiaries about the law of ademption. In the circumstances, the solicitor could not be excused for his breach of trust under s. 32 of the Trustee Act,[17] since his actions were unreasonable. Moreover, the release signed by the beneficiaries did absolve the solicitor. Kathy’s decision to sign it was not an informed one and therefore she did not release her rights as beneficiary under her aunt’s will. Hence, he was liable to Kathy for the amount he paid to Marie.

Her Honour dismissed the solicitor’s contributory negligence claim against Kathy. The fact that she failed to tell him of her private agreement with Marie when she signed the release did not assist him, since Kathy’s acceptance of his proposal for distributing the estate and signing the release were based on incomplete and irrelevant information that he provided to her.

Marie resisted the solicitor’s third part claim against her, in part because she had spent some of the moneys both before and after the solicitor served her with the third party claim. Her Honour found that the solicitor had mistakenly paid Marie an amount equivalent to the sale price of the house. In consequence, she was enriched at his expense and there was no juristic reason why she should not be required to reimburse the solicitor. However, she was only required to reimburse the moneys still in her possession when she was served with the third party claim. She ought not to have spent those moneys until the matter was resolved.

In her reasons, GD Butler JA proposed that the court should modify the law of ademption so that it would not apply to a specific bequest the property of which is not in the testator’s estate at death if a third party has disposed of the property without the testator’s knowledge and at a time when the testator lacks capacity to change her will to make a substitute gift. However, she concluded that her proposed exception to the law could not be applied in this case for lack of evidence about the testator’s intent for a substitute gift. Nor was there any evidence about the balance in the account or the value of the house when the will was written. Thus, her Honour agreed with her colleagues in the disposition of the appeal.

LR Hoegg JA disagreed with her colleague’s suggestion. Comments by judges on the Supreme Court of Canada, cited by her Honour, state that judges should limit themselves to making only incremental changes to the law to keep the common law in step with the evolving fabric of society. They should not intervene if the proposed changes have far-reaching effects, the ramifications of which cannot be gauged accurately. In her Honour’s view the proposed change would alter the substantive law of wills significantly and that could have serious implications to existing rights and could cause confusion and uncertainty. The fact that the testator could no longer change her will to provide for a substitute gift because of her lack of capacity was irrelevant. She had plenty of opportunity until she lost capacity to make such a change. Moreover, no common law jurisdiction has changed the doctrine of ademption judicially. Such a change should be made only by the legislature, as some provinces have done.

With respect, I believe that Justice Hoegg drew the correct conclusion on this point. Courts should not change long-standing principles of property but leave it to the legislature to make desired changes.

[1]    2021 NLCA 43, 71 ETR 4th 174.

[2]    For a more detailed discussion of this doctrine, see Oosterhoff on Wills, 9th ed by Albert H Oosterhoff, C David Freedman, Mitchell McInnes, and Adam Parachin (Toronto: Thomson Reuters, 2021) §14.7 (‘Oosterhoff’).

[3]    If the agreement is subject to conditions precedent, the testator dies after entering into the agreement, and the conditions are not satisfied, the agreement is not enforceable and therefore does not cause the gift to adeem. See, e.g., Dearden Estate v Pittman (1987), 26 ETR 111 (Man QB).

[4]    1923 CarswellAlta 152, [1923] SCR 642, para 32.

[5]    Somewhat freely translated, the expression means: ‘The law is harsh, but it is the law’ and must therefore be followed.

[6]    See, e.g., Lawes v Bennett (1785) 1 Cox 167 (Ch Div); Re Carrington, [1032] 1 Ch 1 (CA); Re Pyle, [1985] 1 Ch 724 (CA); Re Reeves; Reeves v Pawson, [1928] 1 Ch 351.

[7]    See, e.g., Culbertson v Culbertson, 1967 CarswellSask 36, 62 FLR 2d 134 (CA).

[8]    Re Stevens, [1946] 4 DLR 322 (NSCA); Re Rodd (1981), 10 ETR 117, and Timothy Youdan, comment, ibid. at 118. However, see also Re Cudeck, 1977 CarswellOnt 387, 78 DLR 3d 250 (SC), which came to a different conclusion.

[9]    See, e.g., Re Wood (Estate), 2004 BCCA 556ll Re Rodd, 1981 CarswellPEI 21, 10 ETR 117 (SC). New Brunswick, Northwest Territories and Nunavut have enacted legislation that ameliorates the effects of the common law against following the property into a mixed fund. See Wills Act, RSNB 1973, c. W-9, s. 20(3); RSNWT 1988, c. W-3, s. 15(3); RSNWT (Nu) 1988, c. W-3, s. 15(3).

[10]   See Hicks v McClure (1922), 64 SCR 361. Cf. Diocesan Synod of Fredericton v Perrett, [1955] SCR 498.

[11]   On this point see Oosterhoff, supra, §14.6.3(a).

[12]   For a case which applies this principle, see Re Britt, 1968 CarswellOnt 120, 68 DLR 2d) 26. The testator held a first mortgage on real property and in her will bequeathed ‘all monies owing’ on the mortgage to family members in equal shares. The mortgagor defaulted and the testator instituted foreclosure proceedings. She obtained judgment on the covenant and, when the mortgagor did not redeem, obtained a final order of foreclosure. The court held that the gift had not adeeemed.

[13]   RSO 1990, c S.26. For similar legislation, see Wills Act, RSNB 1973, c W-9, s 20(2); RSNWT 1988, c W-5, s 14(2), (3); RSNWT (Nu) 1988, c W-5, s 14(2), (3); RSNS 1989, c 505, s. 32; SS 1996, c W-14.1, s 26(2), (3); See also Wills and Succession Act, SA 2010, c W-12.2, s 10. See further Oosterhoff, supra, §14.7.4.

[14]   For a case that applies this legislation, see DiMambro Estate v DiMambro (2002), 48 ETR 2d) 22.

[15]   Substitute Decisions Act, 1992, SO 1992, c 30, s 36. To the same effect, see Infirm Persons Act, RSNB 1973, c I-8, s 18; Wills Act, CCSM, c W150, s 24; Adult Guardianship and Co-decision-making Act, SS 2000, c. A-5.3, s 61; Wills, Estates and Succession Act, SBC 2009, c 13, s 48. For an application of such legislation, see Doyle v Doyle Estate, 1995 CarswellOnt 826, 9 ETR 2d 162 (Gen Div); Forbes v Millard Estate, 2017 BCSC 361; Re Thorne Estate, 2018 BCSC 934, 37 ETR 4th 326.

[16]   For the tracing remedy, see the text at footnotes 8 and 9, supra, and see also Oosterhoff, supra, §14.6.3(b).

[17]   RSN 1990, c. T-10.

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