Forsyth (Re)

2010 BCSC 1720 Forsyth (Re) IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: Forsyth (Re), 2010 BCSC 1720 Date: 20101202 Docket: 08-1132 Registry: Victoria In the matter of the Bankruptcy of Robert Brent Forsyth Before: The Honourable Mr. Justice Williamson Reasons for Judgment Counsel for the Applicant: P.J. Roberts Counsel for the Respondent, Winroc: J. Hanley Counsel for the Respondent, Dannburg: K. Siddall Counsel for the Respondents, Ankekenman, Janzen and Isaak: S. Twining Place and Date of Hearing: Victoria, B.C. November 3, 2010 Place and Date of Judgment: Victoria, B.C. December 2, 2010 [1] This is a contest between the creditors of the bankrupt, Robert Forsyth ["Forsyth"], and the creditors of a company named Divergent Environments Inc. ["Divergent"]. [2] Divergent was created by Forsyth in August of 2003 as a management company. He was the sole owner and director of Divergent. Forsyth, who was involved in buying and developing properties, obtained title to a property at 2600 Dubbin Road in Kelowna [the "Dubbin Property"] as a result of a dissolution of a partnership. Apparently the Dubbin Property was in poor shape and required extensive upgrading or alteration. [3] On January 31, 2004, some six months after Forsyth took title to the Dubbin Property, he signed a declaration of trust stating that his entire interest in the property would be held in trust for Divergent [the "Declaration"]. The Declaration reads as follows: DECLARATION OF TRUST KNOW ALL MEN BY THESE PRESENTS that I, ROBERT BRENT FORSYTH of #1060 Valewood Trail, Victoria, B.C. V8X 5G7, declare that my registered interest in and to Lot 1, Sec. 20, Tp 23, ODYD Plan 19732, being 2600 Dubbin Road, Kelowna, British Columbia (the "Lands and Premises") is held by me in trust for DIVERGENT ENVIRONMENTS INC. (the "Beneficiary"), and that I have no interest whatsoever in the Lands and Premises, other than that of a bare trustee, and that the use and enjoyment thereof, and any distribution whether of income or capital and whether in cash or otherwise, as well as any proceeds arising from a rental or sale thereof, do not in any manner belong to me, but are the property of the Beneficiary. I further declare that I will not encumber or alienate the property in any way except upon the direct instructions of the Beneficiary, and that I will execute and deliver to the Beneficiary, upon demand, a transfer in registerable form of the Lands and Premises, without compensation of any kind. [4] On January 30, 2008, Forsyth was assigned into bankruptcy. Subsequently, the Dubbin Property was sold. The net funds from that sale, $767,498.65, were paid to the Trustee in Bankruptcy, the applicant C.E. Craig and Associates ["Craig"], to be held pending the determination of the validity of the Declaration. [5] Craig, as Trustee in Bankruptcy, seeks a declaration from this Court that the Declaration is invalid and of no force and effect. Creditors of Forsyth support that position. However, creditors of Divergent say the Declaration is valid and the funds should be declared to be the property of Divergent. [6] There is little disagreement on the law concerning what must be established to create a valid trust. In order for a valid trust to exist, three certainties must be established: (1) certainty of intent, (2) certainty of subject matter, and (3) certainty of object: see, for example, Quesnel & District Credit Union v. Smith (1987), 19 B.C.L.R. (2d) 105, 45 D.L.R. (4th) 386 (C.A.), at p. 112 of B.C.L.R. [7] Craig makes three submissions. First, it says the "three certainties test" is not met. Second, it relies on section 91(2) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3. Third, Craig says the trust is a "sham" as that word is used in the authorities. I will address each of these grounds below. The Three Certainties [8] I turn first to the question of whether the three certainties exist in the circumstances here. With respect to intent, I keep in mind the statement of Burnyeat J. in Bankruptcy of Taylor Ventures Ltd. (554925 B.C.), 2004 BCSC 1612, 7 C.B.R. (5th) 8, at para. 33 of BCSC, that to establish intent: ...it must be established that there was a clear intent to create a trust... and the language used by the settler must be imperative... As well, the intention of the settler of the trust must be ascertained at the time of the settling of the property transferred upon the trustee... For the trust to be valid, the certainty of intent must be made known to the trustee... [case references and citations omitted] [9] In this case, the Declaration is clear with respect to intent. Forsyth's interest in the Dubbin Property is to be held by him as "a bare trustee" for Divergent. It cannot be said that Forsyth, as trustee, was not aware of this arrangement at the time the intent of the trust was purportedly established. [10] Nor can it be said that the express words of the Declaration leave any doubt that the subject matter of the trust is the interest which Forsyth holds in the Dubbin Property. The Dubbin Property is identified unambiguously by both its legal description and street address. The interest in that property is described; it is Forsyth's "registered interest", which at the time was a fee simple. The Declaration states, without qualification, that he has "no interest whatsoever in the Lands and Premises, other than that of a bare trustee". The examination for discovery evidence demonstrates that at the time Forsyth intended to develop the Dubbin Property in his capacity as trustee of Divergent. [11] Craig does not challenge certainty of object. I am satisfied the object of the Declaration was to render Forsyth the trustee and Divergent the beneficiary of all of Forsyth's interest in the Dubbin Property in contemplation of "any proceeds arising from a rental or sale" of that property. Section 91(2) of the Bankruptcy and Insolvency Act [12] Though repealed as of September 18, 2009, section 91(2) at the time this action was initiated provided as follows: Any settlement of property made within the period beginning on the day that is five years before the date of the initial bankruptcy event in respect of the settlor and ending on the date that the settlor became bankrupt, both dates included, is void as against, ...the trustee if the trustee can prove that the settlor was, at the time of making the settlement, unable to pay all the settlor's debts without the aid of the property that was the subject of the settlement or that the interest of the settlor in the property did not pass on the execution of the settlement. [13] As can be seen, this section places the onus upon the trustee, here Craig, to prove that the settler, here Forsyth, was unable to pay his debts at the time of the execution of the Declaration. I am not persuaded that that onus has been met. [14] Forsyth was not declared bankrupt until January 30, 2008. The examination for discovery evidence indicates he could meet his financial obligations four years earlier in January 2004. For example, when examined for discovery by counsel for Craig on May 21, 2010, Forsyth was asked whether he, personally, was able to pay his personal obligations as they fell due. He answered "Yes". Subsequently, a number of similar questions were put to him. None of his answers support the inference that he was unable to pay his debts without the aid of the Dubbin Property that was later the subject of the Declaration. [15] I therefore decline to declare the trust invalid on this ground. Sham [16] In order to succeed on this ground, Craig must demonstrate that all of the parties to the sham had a common intention that the acts done or documents executed not create the legal rights and obligations which they give the appearance of creating: see Trident Foreshore Lands Ltd. v. Brown et al., 2004 BCSC 1365, [2004] B.C.J. No. 2197 (QL), at para. 39. [17] I am satisfied that the trust created here meets that definition of "sham". The post Declaration conduct of Forsyth is inconsistent with a genuine trust. [18] The evidence discloses that on four occasions Forsyth listed the Dubbin Property for sale without disclosing the existence of the trust and without a resolution from Divergent authorizing him to do so. These actions ignore the words of the Declaration which state he was not to "encumber or alienate the property in any way except upon the direct instructions of the Beneficiary". [19] On examination for discovery, Forsyth defended such actions by saying that his "name and Divergent's name are very interchangeable all the way through the development" and that there was an "understanding" between him personally and him as the "directing mind of Divergent". I am not persuaded that can be said to be "direct instructions". [20] Further, Forsyth mortgaged the Dubbin Property at least four times. Again, Divergent passed no resolutions authorizing such encumbrances. Nor, in negotiating these mortgages, did Forsyth did tell the mortgagees (but for one) of Divergent's interest. In so acting, he violated the terms of the mortgages themselves which required the borrower to declare to the lender that: (a) the borrower owns the land and has the right to mortgage the land to the lender, (b) the borrower's title to the land is subject only to (i) those changes and encumbrances that are registered in the land title office at the time the borrower signed the mortgage form, and [...] (c) subject to paragraph (b), the borrower (i) has not given any other charge or encumbrance against the land, and (ii) has no knowledge of any other claim against the land. [21] On only one occasion did Forsyth notify a mortgagee of the existence of the Declaration. But he made that disclosure on an application in which the lawyer who drew up the Declaration also acted for him on the mortgage loan. The inference to be drawn here is that if it were not the same lawyer, Forsyth would have acted as he did on the other mortgage dealings and failed to inform the mortgagee of the trust. [22] Further, Forsyth obtained a foreshore license on the water adjacent to the Dubbin Property without disclosing the existence of the trust despite the requirement of the licence that the owner notify the granter "if you transfer or assign your interest in fee simple". [23] The question, then, is can post Declaration conduct, which appears inconsistent with or in disregard of the trust, result in a finding that the trust is invalid? Were Forsyth's actions inconsistent with the terms of trust, and therefore demonstrative of an intention that the Declaration not create the legal rights and obligations which it gives the appearance of creating? [24] I am satisfied that post Declaration conduct in these circumstances is relevant to that finding: see Cohen J.'s use of such evidence In the Bankruptcy of Larry Peter Biggar, 2005 BCSC 1657, 16 C.B.R. (5th) 1, in upholding a master's conclusion that a trust was a "sham", and the cases cited therein. For example, in Hirji v. Scavetta (1993), 15 O.R. (3d) 371, [1993] O.J. No. 2546 (QL) (Gen. Div.) the settlor and the trustees operated together and no attention was paid to the proper operation of the trust. In Merklilnger v. Merklilnger (1992), 11 O.R. (3d) 233, [1992] O.J. No. 2201 (QL) (Gen. Div.), a husband continually treated the property as his own and only invoked the trust designation when it became convenient to do so. In these circumstances, the courts found the trusts to be a "sham". [25] In the case at bar, as is demonstrated above, Forsyth acted as if he as the settler and he as the trustee were one and the same. He failed to disclose the existence of the trust when obligated to do so. He encumbered the property without proper instruction or authority from Divergent (the beneficiary). He failed to disclose the existence of the trust to relevant government agencies. Upon a review of the evidence, I conclude Forsyth's actions are consistent with an intention to retain full control over the trust property, and demonstrate that the Declaration did not actually create the legal rights and obligations which it appeared and purported to create. [26] In the result, the Declaration is invalid and of no force and effect. The net proceeds of the sale of the Dubbin Property will vest in Craig, the Trustee in Bankruptcy. Craig is entitled to reasonable costs and disbursement of this application from those proceeds. [27] Order accordingly. "Williamson J."