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What Fraud Victims Should Know about Breach of Trust in Land Transaction Scenarios

We are often asked by fraud victims for recovery information with respect to breaches of trust related to land transactions. We recently recovered $2.+M for victims of fraud in a land transaction where the initial investment was $1.+M. This recovery was obtained by way of a settlement on the evening before a four week trial was scheduled to commence.

While our case involved a settlement, the facts were somewhat similar to the recent decision of 1168760 Ontario Inc. c/o R&R Realty, Peter Clark & J.G. Rivard Limited v. 67006037 Canada Inc. & Denis Bertrand, 2017 ONSC 5149. This decision provides a good review of the law of breach of trust as it applies to land transaction scenarios.

The story is somewhat complex and involves the interpretation of the term “fraudulent person” in the Ontario Land Titles Act, R.S.O. 1990, c. L.5. The facts, as set out by the Court, are as follows.

A Trust Created for Holding Real Property

The defendant Denis Bertrand (“Bertrand”) had held title “in trust” to approximately 55 acres of land in the village of Cumberland (the “Property”) since 1995.

Bertrand held legal title to the Property in the name of “Denis Bertrand in trust” pursuant to a Declaration of Trust dated October 20, 1995. The beneficial owners of the Property were:

  • Bertrand – 27.03% interest,
  • Peter Clark – 36.48% interest, and
  • R&R Realty – 36.48%.

Transfer of Trust Property without Notice to the Beneficiaries

In 2005, Bertrand sold the entire Property to 67006037 Canada Inc. (“670”) for the sum of $100,000.00 without notice to or the consent of the other two beneficial owners. He retained all of the proceeds of the sale. On March 30, 2007, Bertrand conveyed a fee simple interest in the Property to 670.

670 was owned by Mathieu Joncas, a barrister and solicitor of the City of Gatineau, practicing in the City of Ottawa.

At the time of the sale, Bertrand had two executions registered against him – one for $329,487.00 plus costs and interest and another for approximately $37,502.00.

Bertrand was able to complete the sale by signing a false affidavit, which was relied on by the Director of Land Titles and Joncas, stating that he was not one and the same person as the Denis Bertrand who was subject to the executions.

When Peter Clark and R&R Realty learned of what happened, they sued Bertrand and 670.

Submissions at Trial

  1. Bertrand held the property in trust as a “bare trustee” on behalf of the beneficial owners;
  2. Bertrand was a “fraudulent person” as defined by the Land Titles Act (the “Act”) because he forged or falsified an affidavit stating that he was not the same person as the “Denis Bertrand” who had two executions registered against him totaling over $350,000.00 when he knew this was a false statement that was required to complete the sale;
  3. the purchaser 670 had noticed that Bertrand held the title in trust from a source other than the Land Titles Registry,
  4. 670, with its operating mind Joncas, was not a bona fide purchaser without notice; and
  5. as a result, 670 / Joncas held title to the property on a constructive trust for the Plaintiffs to the extent of their beneficial interests.

Bertrand submitted that:

  1. his signing of the affidavit falsely stating that he was not the same person as the Denis Bertrand who was subject to two executions was irrelevant;
  2. he was not a “bare trustee”, but rather a full trustee with authority to sell the property without the consent of the beneficial owners;
  3. the trust was a conceptually distinct entity from himself, such that he was able to sell the property as a trustee free of any personal judgments against him; and
  4. if he breached the terms of the trust, so did purchaser Joncas.

Purchaser Joncas argued that:

  1. he / 670 was a bona fide purchaser without notice;
  2. he was not required to ensure that Bertrand had authority to sell as a trustee;
  3. Bertrand was not a “fraudulent person” as defined in the Act because he did not forge the affidavit stating that he was not the Denis Bertrand with executions against him; and
  4. Bertrand was not a “fictitious person” as defined in the Act, rather he just signed a false affidavit in order to complete the sale.

For these reasons solicitor Joncas submitted that the title should not be rectified.

In support of Joncas, the Director of Titles argued that Bertrand was not a “fraudulent person” or a “fictitious person” as defined in the Act. As a result, the Director submitted that there existed no basis on which to rectify the title.

The Plaintiffs, in reply, submitted that while a trust is conceptually a distinct entity, it is not a separate person. Where the trustee is also the owner of a beneficial interest in the property a writ of execution binds the lands in which the trustee has a beneficial interest.

The Execution Act

The Court referred to Section 10(6) of the Execution Act, R.S.O. 1990, c. E.24 which provides that:

(6)  … a writ of execution … binds the lands against which it is issued from the effective date of the writ.

Bare Trustee

The Court held that the distinguishing characteristic of the bare trust is that the trustee has no independent powers, discretions or responsibilities. His only responsibility is to carry out the instructions of his principals – the beneficiaries. If he does not have to accept instructions or if he has any significant independent powers or responsibilities, he is not a “bare trustee”.

The Court further held that where the trustee holds property without any other duty to perform except to convey it to the beneficiaries and where the trustee has no independent powers, discretion or responsibilities, he or she is a “bare trustee”. A “bare trust” exists when the trust document provides that the beneficiaries are able to call for the property on demand and no active duties were ever imposed on the trustee.

Trustees as Holders of Title to Real Property

The Court referred to the text Osterhoff on Trusts, Commentary and Materials, 7th ed. (Toronto: Thomson Carswell 2009), chapter 1 at p. 19, where the author stated as follows:

The trust is, therefore, a relationship involving obligations owed by the person who holds the trust property. The trust, as such, is not an entity. The trust does not hold property; property is held in trust by the trustee.

The Court held that the fact that the property was registered in the name of “Denis Bertrand in Trust” did not create a person different from Denis Bertrand personally. Bertrand as trustee and Bertrand who held a 27.03% beneficial interest in the property were the same person.

The Court further held the trust document did not give Bertrand any authority to sell or mortgage the property or any other rights to deal with the property. The Court rejected Bertrand’s evidence that he believed that the other beneficial owners had lost interest in the property and therefore that he assumed he could proceed to sell the property without their consent.

The Land Titles Act and Fraud

a)   under which a fraudulent person purports to receive or transfer an estate or interest in land … or

d)   that perpetrates a fraud as prescribed with respect to the estate or interest in land affected by the instrument;

A “fraudulent person” is defined as a person who executes / purports to execute an instrument if,

a)   the person forged the instrument,

b)   the person is a fictitious person, or

c)   the person holds oneself out in the instrument to be, but knows that the person is not, the registered owner of the estate or interest in land affected         by the instrument.

The Court held that the essential purpose of land titles legislation is to provide the public with security of title and facility of transfer. The notion of title registration establishes title by setting up a register and guaranteeing that a person named as the owner has perfect title, subject only to registered encumbrances and enumerated statutory exceptions.

The Court noted that the Land Titles Act was amended in 2007, specifically to make amendments to section 78(4) to address ongoing concerns with fraud in the real estate context. The policy objectives of the amendments included protecting innocent land owners from fraud, shielding innocent purchasers for value without notice of fraud, and maintaining the integrity of the land registration system.

The Doctrine of Deferred Indefeasibility

The Court held that the 2007 amendments to the Act, defining a “fraudulent instrument” and a “fraudulent person”, were intended to be consistent with the Court of Appeal’s decision in Lawrence v. Maple Trust Company, 2007 ONCA 74 (CanLII), and to codify the doctrine of deferred indefeasibility. These definitions, as integrated in the amendments, should be interpreted contextually and purposively in accordance with the legislature’s intent to:

  • provide protection for innocent land owners against fraud;
  • shield innocent purchasers for value without notice of the fraud;
  • maintain the integrity of the land registration system; and
  • implement the doctrine of deferred indefeasibility set out by the Court of Appeal.

According to the doctrine of deferred indefeasibility, the party acquiring an interest in land from the party responsible for the fraud (the “intermediate owner”) is vulnerable to a claim from the true owner because the intermediate owner had an opportunity to avoid the fraud. However, any subsequent purchaser or encumbrancer (the “deferred owner”) has no such opportunity. Therefore, the deferred owner acquires an interest in the property that is good as against all the world.

Civil and Criminal Fraud

The Court referred to the decision of R. v. Théroux 1993 2 SCR 579 wherein Justice McLaughlin (as she then was) stated that while she did not provide a precise definition for civil fraud and was dealing with criminal fraud, the essential elements of fraud are dishonesty, which can include non-disclosure of important facts, and deprivation or risk of deprivation.

The Court held that Bertrand made a misrepresentation and concealed a material fact by signing a false affidavit stating that he was not one and the same person as the Denis Bertrand who was subject to two writs of execution. By signing the false affidavit, Bertrand knowingly made a misrepresentation to purchaser Joncas and the Land Titles Registrar stating that he was not the same

The motive of Denis Bertrand was to avoid his execution creditors. As a result of his misrepresentation, Bertrand was able to sell the beneficial interests of the Plaintiffs and deprive them of their interest in the lands.

The Court held that Bertrand’s act of signing the false affidavit was a misrepresentation which induced the Land Titles Director to transfer the title of the property to the detriment of the plaintiff beneficial owners who had not consented and also to the detriment of the execution creditors and constitutes a fraud.

In this situation, purchaser Joncas was an intermediate owner, not a differed owner, and as such would not be protected by the deferred indefeasibility doctrine. In this situation, Joncas is an “intermediate” owner because he acquired the land from a party responsible for the fraud, namely Bertrand.

Fictitious Person

The Court held that a “fictitious person” has not been defined in the Act but was judicially considered by the Supreme Court of Canada in the Fok Cheong Shing Investments Co. Ltd. v. The Bank of Nova Scotia, 1982 CanLII 57 (SCC), [1982] 2 S.C.R. 488.

The Court found that the Denis Bertrand who was not subject to the executions was a fictitious person within the meaning of the Act because this interpretation is consistent with the intention and purpose of the 2007 amendments, the Supreme Court’s decision in Fok, and with the deferred indefeasibility doctrine.

Forgery

The Court held that the word “forged” is not defined in the Act, but that the Canadian Oxford Dictionary defines “forged” as “to write a document or signature in order to pass it off as written by another”.

The Court also relied on Black’s Law Dictionary which defines “forgery” as a false or altered document made to look genuine by someone with intent to deceive.

The Court found that the affidavit and the transfer instrument were false documents because they stated that Denis Bertrand was not one and the same person as the Denis Bertrand subject to the writs of execution. Bertrand signed the affidavit pretending that he was another person than the Denis Bertrand who was subject to the executions to make the transfer look genuine and with the intent to deceive the Land Registrar and the purchaser. The Court found that Bertrand’s actions were consistent with the definition of forgery.

Fraud Unravels Everything

The Court cited Lazarus Estates Ltd. v. Beasley, 1956 1 ALL ER 341 at page 6, where Lord Denning stated that fraud unravels everything:

No court in this land will allow a person to keep an advantage which he has obtained by fraud. Fraud unravels everything. The Court is careful not to find fraud unless it is distinctly pleaded and proved; [but] once it is provided it eviciates [sic] judgments, contracts, and all transactions whatsoever …if this declaration is proved to have been false and fraudulent, it is a nullity and void.

The Court then applied an unravelling as against the third party purchaser of the land.

Unravelling the Fraud

The Court held that a third party that acquires an interest in the disputed title is only protected where he or she is a bona fide purchaser for value. Whether purchaser Joncas had actual notice of the fraud committed by Bertrand is not critical to the outcome because Joncas was an “intermediate” owner, and was not a “deferred” owner, who would take the property free and clear provided they were a bona fide purchaser for value without notice of any fraud.

The Court held that Joncas did not acquire notice of the fact that the property was held in trust based on a search of the land titles system because the search of title was made after the offer to purchase had been signed.

The Court held that the offer to purchase was prepared by Joncas himself and was not prepared by his lawyer although he did seek legal advice about terms to be inserted. Joncas had notice of the trust either from the vendor or through viewing a tax bill or from some other source, but it was not through the Land Titles System.

The Court held that Joncas became aware of the existence of the trust before making any investigation of title, and as a result, he did not rely on any documents registered in the Land Titles System.

The Test for Knowing Receipt

The Court cited Gold v. Rosenberg, 1997 CanLII 333 (SCC), [1997] 3 S.C.R. 767, wherein Justice Iacobucci writing for the Supreme Court of Canada set out the requirements for a beneficiary to validate his or her claim and interest in trust property that was purchased by a stranger to the trust (“knowing receipt cases”). In order to recover the disputed property, a plaintiff must prove the following (at para. 53):

  1. that the property was subject to a trust in favour of the plaintiff;
  2. that the property the defendant received was taken from the plaintiff in breach of trust; and
  3. that the defendant did not take the property as a bona fide purchaser for value without notice. The defendant will be taken to have notice if the circumstances were such as to put a reasonable person on inquiry and the defendant made none, or if the defendant was put off by an answer which would not have satisfied a reasonable person.

The Court also noted the criteria that would be suggestive of “notice” in cases where trust property is acquired by a third party as follows:

  1. actual knowledge;
  2. willfully shutting one’s eyes to the obvious;
  3. willfully and recklessly failing to make such inquiries as an honest and reasonable man would make;
  4. knowledge of circumstances which would indicate the facts to an honest and reasonable man; or
  5. knowledge of circumstances which would put an honest and reasonable man on inquiry.

The Court further cited Citadel General Assurance Co. v. Lloyds Bank of Canada, 1997 CanLII 334 (SCC), [1997] 3 S.C.R. 805 at para. 24, where the Court held that the trial judge does not need to make a finding that a breach of trust was fraudulent to find the purchaser liable for “knowing the receipt of trust property.”

The Court held that:

  1. Joncas was aware that the property was subject to a trust;
  2. the trust was a bare trust and Bertrand was not authorized to sell the property without the consent of at least two of the three beneficial owners. Therefore, he was acting in breach of trust; and
  3. Joncas had at least constructive notice that he was not a bona fide purchaser for value.

The Court found that the circumstances which should have put Joncas on inquiry as an honest and reasonable person were the following:

  1. Joncas, though his solicitor, was aware that two writs of execution were registered against a person with the same name as the vendor. Joncas and his lawyer would have known that the executions against the vendor would bind the land and form an encumbrance on the property. Joncas and his lawyer could have and should have obtained the identification details from the execution creditors and compared those details with those from Bertrand and they did not make reasonable inquiries;
  2. Joncas knew the property was held in trust because he prepared the offer to purchase before the title was searched;
  3. Joncas, as a lawyer, would have known that there are different types of trusts and that the trust declaration would set out the authority of the trustee and specify whether or not it was a bare trust. This was a different situation from an estate trustee that was appointed by a will which contained a power of sale and where the authority to sell property was expressly given to the estate trustee. In this case, Joncas could have inquired about whether the trustee had authority to sell or whether the consent of the beneficial owners was required;
  4. the fact that Joncas entered into a private sale agreement for trust property where the property had not been listed for sale with a real estate agent was a suspicious circumstance. Joncas would have known that Bertrand, as a trustee, owed a fiduciary duty to the beneficial owners, that Bertrand had a duty to act reasonably to obtain the highest value, and that to do so generally requires exposing a property to the market for a period of time to determine the types of offers that would be received in order to comply with his fiduciary duties. This was particularly so where the property was a unique property of 55 acres in the village of Cumberland that had potential future development possibilities, which could make it very valuable;
  5. Bertrand advised Joncas that he was not going to use a lawyer if Joncas’ lawyer would not act in a conflict situation. While it was not against the rules of professional conduct at that time for Joncas’ lawyer to act for both purchaser and vendor, given the undisclosed details of the trust and that the sale was proceeding without any real estate agent, it was a suspicious circumstance where the vendor proposed not to use his own lawyer on such a conveyance;
  6. Joncas and Bertrand used the same lawyer and therefore in accordance with the consents signed they are deemed to have knowledge of each other’s communications with their jointly retained lawyer. The Court inferred that Joncas would also have known through his lawyer’s search of titles that the property was acquired more than 10 years earlier for $50,000.00 more than the agreed purchase price of the $100,000.00;
  7. Bertrand’s insistence that 50% of the purchase price be paid as a deposit directly to Bertrand and not to his lawyer in trust was also a suspicious circumstance. Normally, deposits on a real estate sale are held by the real estate broker in trust or by the lawyer in trust. The Court noted that deposits of one half of the purchase price are rarely paid directly to the vendor before closing;
  8. the fact Joncas was not aware of the appraised value of $300,000.00 was a suspicious circumstance when the property was appraised at $300,000.00 in 2005 for purposes of the purchase of the Royal Bank of Canada’s beneficial interest in the property.

Disposition

The Court held that as a result of having found that Bertrand was a fraudulent person and that the transfer was accomplished by a fraudulent instrument, the transfer to 670 was void and the appropriate remedy was to undo the fraud and to rectify the title to its original state. The Court therefore ordered the title to the property be rectified in accordance with the beneficial ownership interests, namely:

  • R&R Reality – 31.76%;
  • Peter Clark – 36.48%;
  • G. Rivard Ltd. – 4.73%, and
  • Denis Bertrand – 27.03%.

Costs

The decision on costs is reported at 1168760 Ontario Inc. c/o R&R Realty, Peter Clark & J.G. Rivard Limited v. 6706037 Canada Inc. & Denis Bertrand, 2017 ONSC 7497.

The Court held that the issues involved were very complex, that Bertrand was found to be a fraudulent person who breached his fiduciary duty as a trustee, and that his conduct was reprehensible.

The Court held that Joncas failed to make the inquiries of a reasonable and honest purchaser and was not a bona fide purchaser without notice. The fact that Joncas is a lawyer only increased his knowledge of the need to make further inquiries in the circumstances and he failed to do so.

The Court noted that on April 29, 2016, the Plaintiffs made an offer to settle, whereby 670 would keep the 27.03% interest purchased from Bertrand and would convey the remaining 72.97% back to them. If the offer had been accepted within 10 days the action would have been dismissed without costs, and if accepted after 10 days costs would be claimed.

The Court found that 670 achieved a less favourable result after trial than the offer to settle made by the Plaintiffs, and that the Plaintiffs had achieved a result as favourable as the terms of their offer to settle.

The Court held that the Defendants should pay costs on a joint and several basis for fees on a partial indemnity basis to April 29, 2016, in the amount of $35,000 plus $4,550 HST, and that the Defendants should pay costs on a substantial indemnity basis from April 29, 2016, in the amount of $130,000 for fees plus $16,900 HST thereon plus disbursements of $15,000 plus $1,869 for HST on the taxable disbursements for a total of $203,319.00.

In other words, on a $200,000 claim, the Plaintiffs were awarded a cost order for the same amount.

Full Reasons for Judgment

For the full reasons for judgment for this case, see 1168760 Ontario Inc. c/o R&R Realty, Peter Clark & J.G. Rivard Limited v. 67006037 Canada Inc. & Denis Bertrand, 2017 ONSC 5149, or https://www.canlii.org/en/on/onsc/doc/2017/2017onsc5149/2017onsc5149.html?searchUrlHash=AAAAAQAPYmVydHJhbmQgam9uY2FzAAAAAAE&resultIndex=2

See also 1168760 Ontario Inc. v. 6706037 Canada Inc. & Denis Bertrand, 2017 ONSC 7497, or https://www.canlii.org/en/on/onsc/doc/2017/2017onsc7497/2017onsc7497.html?searchUrlHash=AAAAAQAPYmVydHJhbmQgam9uY2FzAAAAAAE&resultIndex=2

Inquiries

At Investigation Counsel, we investigate and litigate fraud recovery cases. If you discover you are a victim of fraud, contact us to have your case assessed and a strategy for recovery mapped out before contacting police or alerting the fraudster. We also promote victim advocacy and academic discussion through various private and public professional associations and organizations. If you have an interest in the topics discussed herein, we welcome your inquiries.

 

Norman Groot

About Norman Groot

Based on my police experience and my experience thereafter as a litigator, I have joined forces with other lawyers with police experience and created the law firm Investigation Counsel Professional Corporation.

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