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Resulting and Constructive Trusts: The Various Types

Resulting Trusts Arising from Mortgage Fraud

The Alberta Court of Appeal observed in Luitenko v. McAleer that a resulting trust arose out of mortgage fraud. The respondent, Erika Luitenko, who was ineligible for a mortgage, purchased a house by committing fraud with help from her friend Lada McAleer and Lada’s husband. The purchase price of approximately $185,000 was given by Ms. Luitenko as a down payment as well as the lawyer’s fee to complete the transaction. It was placed in the joint names of the McAleers and their son. Ms. Luitenko lived in the house for over two years starting October 2005, paying the appellants $1,150 per month to cover the cost of the mortgage payments, municipal taxes, and home insurance. She also paid all utilities, renovation, and general upkeep costs for the home.The value of the home continued to increase in a very short amount of time and by 2008 stood at $323,000.

However, in October 2007, the appellants hand delivered a letter to Ms. Luitenko addressed “Dear Tenant” stating that the McAleers were going to sell the home and Ms. Luitenko had to vacate as soon as possible. The appellants contended that they had purchased the home as an investment and that they had originally intended their son and his friends to live in it and pay for all expenses. They said that Ms. Luitenko was taken as a tenant only after the proposed arrangement fell through, because the son’s friends could not afford the rent. Testifying, the son said that he had no knowledge of such an arrangement and that he was not aware that the property had been placed in his name. The trial judge accepted the evidence of Luitenko on finding that the McAleers had concocted their evidence to establish a significant profit. The trial judge found the appellants had agreed to purchase the property under what amounted to be a constructive trust in favour of Ms. Luitenko. However, the Court of Appeal ruled that in reality a resulting trust had been created since there was a clear common intention by the parties that the property was to be purchased by the appellants for the benefit of the respondent.

The Presumption of Advancement

There is a resulting trust in respect of gratuitous transfers, except when the relationship between the parties presumes that the transfer of property was obviously intended as a gift. Until recently, such presumption of advancement was applied where the transfer of property is by a man standing in the place of either a husband or a father. It was the presumption that the transfer was intended as a gift and the onus of proving otherwise was on the person saying that it was not so.

The presumption was due to the belief that when a husband or a father gratuitously transferred property to his wife or his children, he did so out of natural affection and to fulfill his obligation to provide them with the means of subsistence after his death, or to help his children establish themselves in life.

Such a presumption between husband and wife has become nearly extinct in Ontario due to the enactment of matrimonial property legislation, which inter-alia provides that presumption of resulting trust applies between husband and wife as if they were strangers towards each other. Section 14 of the Family Law Act (FLA) provides as follows:

“Presumptions: 14. The rule of law applying to a presumption of a resulting trust shall be applied in questions of ownership of property between spouses, as if they were not married, except that, (a) the fact that property is held in the name of both spouses is proof, in the absence of evidence to the contrary, that the spouses intended to own property as joint tenants; and (b) money on deposit in the name of both spouses shall be deemed to be in the name of the spouses as joint tenants for the purposes of clause (a).”

A Resulting Trust with a Fiduciary Relationship Arising Between Spouses

The children of the late William Charles Down sought an order from the Ontario Court of Justice in Down Estate v. Racz Down to prevent their stepmother from selling or disposing of certain real property. The Court ruled that s. 14 (b) of the FLA does not apply where a fiduciary relationship arises between spouses; one spouse misappropriates joint assets while the other spouse is still alive. After cohabitating for a number of years, the deceased and the defendant, Marion Eleanor Racz-Down, had married in 2003. Their marriage contract provided for a regime of separate property and included a clause stating that any property purchased by one party and placed in the name of the other would be considered a gift so long as it was put in writing and witnessed. Before solemnizing the marriage, both of them individually owned real and personal property. Being a successful businessman, William owned various motels and commercial properties and assets in a number of investment and bank accounts. Marion possessed farm property and accounts in various financial institutions, though the full extent of her wealth was not known to the court. They also acquired joint properties during their marriage, including bank accounts. William executed a power of attorney in favour of Marion in 2004 so that she could sell a condominium property that they held jointly. A short time into the marriage, William started suffering from dementia and his health deteriorated over time. It became necessary to hospitalize him in 2006 and then to put him in a nursing home until his death in May of 2009, when William was 84 years old and Marion 77.

It was found after William’s death that during their brief marriage, Marion had withdrawn a large amount of money from the joint account. Thus, William’s children sued her for damages for conversion, unjust enrichment, and breach of fiduciary duty in the amount of $600,000; this was the amount she was believed to have withdrawn from the joint bank account. No evidence or explanation was given by her in regard to the withdrawals or where the money had been subsequently deposited. She just went on repeating that she was a joint owner of the account. The children claimed that under the power of attorney, Marion was a fiduciary and the appropriation of funds from William constituted a breach of this duty. They maintained that Marion had sold a number of properties held jointly by her and William and converted the proceeds for her own benefit while William was still alive. Marion did not give any reason or purpose to the Court justifying the transfers. Considering William’s vulnerable state and the circumstances pertaining to the couple’s finances, the Court ruled that the spousal relationship established a fiduciary duty which Marion breached and that she had a duty and obligation to follow the provisions of the marriage contract and the will when exercising her discretion in withdrawing funds from the joint account. This fiduciary relationship gave rise to a resulting trust. With regard to the application of the exclusion in s. 14(b) of the Family Law Act, the Court said that, if at all, it applies at the time of William’s death. There is no justification of gratuitous inter vivos transfers, nor is there any negation of the common law principles regarding fiduciaries and resulting trusts in all circumstances involving spouses.

For more information about different types of trusts and how they may affect you, or to learn how you can utilize Canadian trust law to your advantage, contact the lawyers at Levy Zavet PC (Levy Zavet) in Toronto, Ontario.

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