Archive for June, 2011

Can You Trust Your Trust?

Friday, June 24th, 2011

There are many reasons why people set up trusts. Some do it as part of wills or for estate planning purposes. Some do it for tax purposes such as through the creation of an “estate freeze” that allows for succession of family businesses. Some do family trusts so that they can get benefits or pass assets to love ones without running afoul of certain legislation or government programs. And others create trusts in order to try to protect their assets from creditors.

Let’s look at this last example for the purpose of this post. In 1987 a real estate agent decided to become a land developer. He had a company in which he held 51% of the shares and his wife held the other 49%. In 1988 he made a trust declaration in which he stated that he held his 51% in trust for his wife. In 1990 he was involved in a land development that turned out poorly and by 1991 the loan was in default and the financial institution sold the property and went after the fellow under his personal guarantee. In enforcing on the guarantee, the financial institution must have learned that the fellows real assets were tied up in the company. Since he had the majority control, they went after the company – to which he responded that the financial institution couldn’t do anything because it was all held either directly (as to 49%) or beneficially through the trust (as to 51%) by his wife and not by him. So the financial institution took a run at the trust to have it declared invalid.

At trial, the financial institution lost. The trial judge held:

To establish a valid trust, there must be three certainties: the certainty of intention, the certainty of subject matter and the certainty of objects. …

A purported trust may be held to be a “sham” and void where a trust instrument sets out the persons who are to benefit but does not represent the settler’s trust intent which is simply to create the appearance of a disposition of assets through the purported trust. The actual intent, in such cases, is to retain control of the assets purportedly held in trust. In such instances, there is no true intention to create a trust and one of the three certainties is missing; hence, the purported trust is void.

On appeal to the Court of Appeal, the Court held, in a decision released last week, that the trial judge correctly stated the law. However, in applying the facts, the Court relied upon one fact that was volunteered at trial by the chap: that in his mind the control of the company still rested with him both before and after the trust declaration in 1988. This was determinative of the issue for the Court which wrote:

In our view, this evidence conclusively demonstrates that the respondent, Mr. Bozzo, considered himself to have retained control of the assets purportedly held in trust. In his own mind, he had not separated himself from the beneficial interest in the shares. Accordingly, there was no intention to create a valid trust as one of the three certainties was missing and the trust is therefore void.

In other words, just because you have established a trust isn’t enough. You have to treat it like a trust and act as if there actually is a trust. If you don’t, like this poor fellow, the trust will be treated as a nullity and everything you tried to achieve from the trust will be for naught.  The end result, was that the trust was set aside and the financial institution could go after the company and thereby go after the fellow’s assets.  (Of course, I suppose that the other lesson in this drama is: don’t borrow money that you can’t afford to pay back and, if that’s the case, don’t try to hide your money away because that will just tick off the lender even more.)

Something to think about.


Personal or Corporate Liability?

Tuesday, June 21st, 2011

Why does one incorporate?  In part it is to avoid personal liability for business debts or expenses.  Alright, but what happens if you don’t have your company incorporated yet?  Or what if you have several companies and you’re just not sure which one you intend to use for the particular transaction?  The common approach is to indicate that you are not signing in your personal capacity but on behalf of a company.  This is why you sometimes see agreements (usually of purchase and sale) that will identify the purchaser as “Joe Blow in Trust for a Company to be Incorporated” – and if a lawyer is involved, they will usually tack on at the end of that the additional words “And Not in His Personal Capacity”.

Why does this matter?  Because if you do not specify that you are signing on behalf of a company, then you could find yourself personally liable for the debt.  This happened to the unfortunate Mr. Borg in a decision last week from the Ontario Divisional Court.  In that case, Mr. Borg signed his name and put the letters “O/B” beside his name.  He claimed that this meant that he was signing “on behalf of” someone else (ie. a company).  That may well be what he intended, but the trial judge and then the Divisional Court hearing the appeal did not agree that that was sufficient.

Beyond this, one should remember that Section 21 of the Ontario Business Corporations Act provides that if someone enters into a contract on behalf of a corporation that has not yet been incorporated, then that person is personally liable under the contract (even if it says that it is for a corporation to be incorporated) UNLESS the corporation adopts the contract either by its actions or its conduct (that is, by formally adopting the contract or by acting as if it were a party to the contract).

The end result is that you should always be careful in signing a contract that is to be on behalf of a comp

Nuances to Summary Judgment Rule?

Monday, June 20th, 2011

This week the Ontario Court of Appeal is considering a series of cases that will help determine the scope and application of Ontario’s “summary judgment” rule.  This is discussed in an article in today’s National Post.

Why does this matter?  Because as it presently stands it is much easier to get summary judgments.  I obtained summary judgment for some of my clients just this past Thursday and it serves as a simple example.  My clients gave a mortgage to an individual who then defaulted on the mortgage.  After months and months of promises of “don’t worry, I’ll get the mortgage refinanced with a lender and I’ll pay you out”, they got tired of waiting and sued.  In response, the defendant put forward weak defences, one of which was “but you agreed to not require me to pay the 13% interest on the mortgage and that I would only have to pay 2% interest instead.” 

The old, pre-2010, rule was that if there was a genuine issue “for trial” then summary judgment couldn’t be granted.  Under the new rule, summary judgment will be granted unless there is a genuine issue “requiring a trial”.  Why does this difference matter?  Because if my motion for summary judgment last week had been heard in 2009 instead, I likely would have lost the motion and the lawsuit would have continued.  Why is that?  Because under a he said / she said type situation where one party says the interest rate is 13% and the other says it was agreed to go down to 2%, the Court would not determine the issue – unless it could clearly be shown that there could never have been an agreement to go down to 2%.  Under the new rule, the Court is allowed to determine whether the facts are enough to say that there really, truly, is a valid dispute here that needs to be resolved.  It’s not enough anymore to say that there was some sort of “side deal” to reduce the interest rate – the defendant would have to show something really credible to support this position.

Now, under my fact scenario set out above, I expect that the defendant would have had summary judgment made against the defendant even under the old version of the rule.  But let’s add one further factor.  The defendant pulled out a letter signed by one of my clients in which it was agreed that the interest that they would agree to take would be 8% instead of 13%.  Under the old rule, the Court would likely have denied summary judgment because this would give some (not a lot, but at least some) support to the defendant’s contention that there was an agreement to reduce the interest rate – perhaps as low as 2%.  Under the new rule, however, my clients were able to say “OK, even though (a) this was a letter made to help the defendant out; (b) no matter whether the interest was 13% or 8%, the defendant still did not pay; (c) the letter isn’t actually binding upon us; and (d) the letter itself is proof that we did not agree to any 2% rate or we would not have put in 8%; we will agree to only seek judgment on the 8% rate so give us that, instead of the 13% , and we can all save the need for going to trial over the 5% interest difference which really isn’t enough money to make it worthwhile going through a trial.”  The judge accepted this position and judgment was granted at the 8% amount and a lot of unnecessary legal costs and expenses were avoided.  This would not have happened under the old rule.

Is the change to the summary judgment system worthwhile?  Yes and no.  If you are the creditor seeking to get paid, then yes, it is a welcome change.  If you are the debtor and you are looking to get a little more time to try and settle your financing and to deal with your creditors, then it is not a welcome change.  Similarly, regardless of whether you are plaintiff or defendant, if you are the one responding to a motion for summary judgment, the change is not necessarily welcome.  Why?  Because the party who brings the motion for summary judgment has all the time in the world to decide when he/she/it will bring the motion and to prepare for the motion.  The responding party then has to deal with more restrictive timelines.  In one matter last year, I lost a summary judgment motion.  My client told me that he had a ton of evidence to show that the claim against him had no merit.  The other side then brought a motion for summary judgment, but it was brought at a time that was not convenient for my client who was tied up in doing a large transaction which took up most of his attention.  The result was that my client did not get me any documentation with which to fight the motion until it was almost too late – with the result that the responding evidence was not very strong.  The result was that the Court granted summary judgment against my client.  If the motion had been decided under the old version of the rule, while the evidence would still not have been very strong, it would likely have been strong enough to defeat the motion for summary judgment.  To this day my client keeps saying that the judgment was not fair because the amount owed was not the full amount and his evidence would have shown that.  Maybe that’s true, but it’s too late now. 

Whatever the Court of Appeal may ultimately decide from the cases this week, summary judgments will still be at least somewhat easier to obtain nowadays than they could be obtained before January 2010 and that whatever nuances may be placed on the new version of the rule by the Court of Appeal, you should always be prepared right away to fight such a motion and not wait until the last minute.

Something to think about.


Putting and Calling of Shares

Sunday, June 12th, 2011

I attended a seminar recently that discussed the dealings between shareholders. In particular, the discussion related to the succession of a business and had the following fact situation. The father founded the company and had three children – two sons and a daughter. The daughter had no interest in the company at all and she had moved out of the country. One son was very bright and the father believed that this son would take the company to great heights. The other son was also competent and was the sales manager of the company, but he was clearly not the “star” that the first son would become. As a result, the father wanted to give the company over to the “star” son and he would have majority control of the company. However, he still wanted the other children to take some benefits of the company.

One of the concerns was that, eventually, when the business went to the even greater heights that he expected the one son to take the business, there would be some displeasure on the part of the two sons with the daughter’s ownership interest. In effect, why should they work their butts off and she would get the benefit of this without having done anything. Similarly, he was concerned that the “star” son might (due to sibling rivalry or otherwise) no longer get along with the other son (especially after the parents’ death) and he did not want the second son to be prejudiced by the fact that the second son had control of the company. Then, when it came to the daughter, since she was out of the country, her interest in the company was clearly an investment and the father did not want her “stuck” with this investment as it might be difficult to find a buyer for a minority position.

The solution was to establish a system of “puts” and “calls”. A “put” is a right by which a shareholder can require the company to buy-back the shares. A “call” is when the company can require a shareholder to sell back to the company the shares. The result was that the daughter was given the ability to exercise her put option to have her investment “cashed in”, if you will. However, to avoid the company being forced to buy back the daughter’s shares when it could not afford to do so financially, the exercise of the put option was tied to the company meeting or exceding a specific valuation target. Similarly, if the one son felt that the “star” son was treating him poorly, in certain conditions he could exercise a put option so that his shares would be bought. In the case of the situation where the company was doing well but it was due to the efforts of the two brothers and not due to the sister, then at a certain valuation the brothers were entitled to require the sister to have her shares bought-back from the company.

Puts and calls worked well in this situation. They could also be of benefit among non-family situations. To give an example, many shareholder agreements provide for situations where one of the shareholders dies. In that instance, life insurance can fund a mandatory purchase or buy-back of the deceased shareholder’s shares. But what happens if, again for example, there are four shareholders with A and B being the main shareholders but their spouses, C and D, are also shareholders. A and C are married and B and D are married. What happens if A and C get divorced? Do A, B and D want C still around as a shareholder? Probably not. But if there has been no death or disability of C, then A, B and D would want another way to not have to deal with C – and that would be when a call option would be handy. Similarly, if C wants nothing to do with the company, then the put option allows C to “break free”.

Put and calls. Something to think about.


Follow Me on Twitter

Sunday, June 5th, 2011

In my last post I said that I am looking forward to what the next five years will bring.

Well, it is starting off with my finally taking the plunge and joining the rest of the world on Twitter. You can find me at:

Over the past few years I have found that there are several “thoughts” that come into my head that are worthwhile sharing but just don’t have enough substance to make a decent blog posting, so tweeting appears to be the answer.

Let’s see how it goes.


Happy 5th Anniversary to Me

Sunday, June 5th, 2011

It’s hard to think that it has been five years now since I left the big Bay Street firm. Over the years I’ve been asked various questions – do I regret the move? Do I miss the lifestyle? Am I happier now than before? The answers are “no”, “no” and “yes”.

I suppose, though, the biggest question is “if you had to do it again the same way, would you?” I think that if anyone gave a completely unconditional “yes” answer, they would be lying. The reality is that opening your own business has two possibilities: (a) something went wrong or (b) it all went perfectly. If something went wrong, then you have to admit that there are at least some things that you would do differently. If it all went perfectly, then there are no glitches but the flip side is that you probably took too long to plan everything down to the final detail so minutely that you probably should have taken the plunge months (years?) earlier. In my situation, I think that both actually applied. While I have had some glitches, they were very minor so I almost had it perfect. That said, if I had to do things over again, I probably would have made the jump earlier than I did. I put almost two years of planning into the move to go out on my own. In hindsight, I probably could have shaved off at least six months of “fine tuning”.

But it’s always a fine balancing act and I doubt that anyone ever gets it perfect. That said, I have no regrets on how the last five years have gone. When I was a young lawyer I practiced personal injury law. I wasn’t on for the plaintiff’s side, but instead for the insurance companies. I learned a fair amount about the human body, about many different ways that we can mangle our bodies in car crashes or otherwise, and how the legal system works and the values that are put on lost limbs, death and other injuries. I am more than pleased to say that I have forgotten much of this information. What did stick with me, though, was a feeling.

In particular, I had one case with one client. My client was an insurance company that is no longer around. The case was a little old lady who came over to Canada from England and bought travel health insurance (like Blue Cross, but not Blue Cross) through my client. The lady was very clearly covered by the policy and the insurer should have paid on the policy. However, the decision was made to fight the claim for reasons that I cannot divulge due to client confidentiality obligations. After not too long on the file I simply could not look at myself in the mirror. I therefore vowed that I would never put myself in a similar position again if I could avoid it. And that is what I am happiest for over the past five years: things may not have gone perfectly over the past five years, but I have never had the feeling that I could not look at myself in the mirror on any client matter. So, that either means that I’ve done a pretty good job and I deserve to feel some self-satisfaction or it means that my moral compass has become deeply skewed and I need to give my head a good shake. Fortunately, with no complaints to the Law Society over the past five years and nobody suing me and nobody assessing my invoices, I will take that as confirmation that I’ve done at least OK over the past five years.

Let’s see what the next five year holds.