Friday, July 18, 2014

Constructive trusts

306440 Ontario Ltd. v. 782127 Ontario Ltd. (Alrange Container Services), 2014 ONCA 548:

[23]       In Canada, constructive trusts belong to the law of remedies.  If a plaintiff successfully establishes a restitutionary claim, often but not always, on the basis of unjust enrichment, the judge may, in the exercise of his or her discretion, grant a constructive trust over specified property if the judge concludes that a monetary award does not properly address the plaintiff's legitimate remedial needs in the particular circumstances: Peter v. Beblow, [1993] 1 S.C.R. 980, at pp. 987-88, 997;Lac Minerals Ltd. v. International Corona Resources Ltd., [1989] 2 S.C.R. 574, at pp. 673-77, per La Forest J.

[24]       Because a constructive trust is a proprietary remedy, it carries with it certain benefits that do not attach to personal remedies.  Those benefits include the removal of the property from the estate of the bankrupt, effectively trumping the priority scheme under the bankruptcy legislation: Peter D. Maddaugh and John D. McCamus, The Law of Restitution, loose-leaf edition (Toronto: Canada Law Book, 2013), at para. 5:200.

[25]       In Lac Minerals, at p. 678, La Forest J. connected the appropriateness of granting the remedy of a constructive trust to the unique benefits that flowed from that remedy: 

The constructive trust awards a right in property, but that right can only arise once a right to relief has been established.  In the vast majority of cases a constructive trust will not be the appropriate remedy. … [A] constructive trust should only be awarded if there is reason to grant to the plaintiff the additional rights that flow from recognition of a right of property.  Among the most important of these will be that it is appropriate that the plaintiff receive the priority accorded to the holder of a right of property in a bankruptcy.  [Emphasis added.]

[26]       The very nature of the constructive trust remedy demands a close link between the property over which the constructive trust is sought and the improper benefit bestowed on the defendant or the corresponding detriment suffered by the plaintiff.  Absent that close and direct connection, I see no basis, regardless of the nature of the restitutionary claim, for granting a remedy that gives the plaintiff important property-related rights over specific property.  A constructive trust remedy only makes sense where the property that becomes the subject of the trust is closely connected to the loss suffered by the plaintiff and/or the benefit gained by the defendant.  Professor Paciocco, at p. 333, explains the need for the connection:

So long as the constructive trust is a remedy attaching to particular property and creating rights to that property in the plaintiff, it would be arbitrary to select simply a particular item of property and impose upon it a constructive trust.  Why that property and not other property?  There is an undeniable allure in ensuring that a plaintiff who is given a claim to particular property as a matter of remedy, [has] a claim as a matter of fact.

[27]       Professor Paciocco goes on to argue that the requirement of a close connection between the property over which the trust is sought and the product of the unjust enrichment is particularly strong in the commercial context.  He observes, at p. 333:

In the commercial context where there should be a hesitance to award proprietary relief, a purer tracing process is justifiable.  This approach accurately describes the prevailing trend in Canadian case law.

[28]       Professor Paciocco's observations made in 1989 are borne out by the subsequent case law.  In Peter, at p. 995, McLachlin J. said:

The constructive trust, based on analogy to the formal trust of traditional equity, is a proprietary concept.  The plaintiff is found to have an interest in the property.  A finding that a plaintiff is entitled to a remedy for unjust enrichment does not imply that there is a constructive trust.  As I wrote in Rawluksupra,for a constructive trust to arise, the plaintiff must establish a direct link to the property which is the subject of the trust by reason of the plaintiff's contribution.[3]  [Emphasis added.]

[29]       The requirement of the direct connection described in Peter, has been reaffirmed and emphasized in Kerr, at para. 51:

As to the nature of the link required between the contribution and the property, the Court has consistently held that the plaintiff must demonstrate a "sufficiently substantial and direct" link, a "causal connection" or a "nexus" between the plaintiff's contributions and the property which is the subject matter of the trust … A minor or indirect contribution will not suffice.

[30]       The direct connection described in Peter, and again in Kerr, has been emphasized in the commercial context in various appellate courts: e.g. Ontario v. NRS Mississauga Inc.; Creditfinance Securities Ltd. (Re), 2011 ONCA 160, 277 O.A.C. 377, at para. 43; Ladner v. Wolfson, 2011 BCCA 370, 24 B.C.L.R. (5th) 43, at paras. 49-53, leave to appeal to S.C.C. refused, [2011] S.C.C.A. No. 475;Michelin Tires (Canada) Ltd. v. Canada, 2001 FCA 145, [2001] 3 F.C. 552, leave to appeal to S.C.C. refused, [2001] S.C.C.A. No. 367.  The comment in Michelin Tires, at para. 19, is particularly apropos to the circumstances of this case:

In particular, a constructive trust will not be imposed unless the plaintiff can point to property in the hands of the defendant that is identifiable as the property, or its proceeds, that was transferred by or obtained from the plaintiff without a juristic reason, or that the defendant could not otherwise retain in good conscience.  That is, the constructive trust attaches to specific assets of the defendant that represent the enrichment; it is not a charge on the defendant's general assets for the amount of the plaintiff's claim.  [Emphasis added.]

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