C. Non-Divisible Property

Author:Roderick J. Wood
Profession:Faculty of Law. University of Alberta

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The BIA identifies two classes of property - trust property and exempt property - as property that is not divisible among the bankrupt’s creditors.92At one time it was thought that this meant that these assets did not vest in the trustee in bankruptcy.93This view is no longer tenable following the decision of the Supreme Court of Canada in Ramgotra (Trustee of) v. North American Life Assurance Co.94The Court held that property designated as non-divisible property vests in the trustee in bankruptcy, but that the property cannot be liquidated and distributed to the creditors who prove their claims in the bankruptcy. Because these assets are incapable of realization by the trustee, they must be returned to the bankrupt before the trustee applies for a discharge from his or her duties.95This theory can produce difficulties for bankrupts and third parties in respect of dealings with the property. There is a period following the bankruptcy and before a transfer back to the bankrupt during which the trustee in bankruptcy holds legal title to the assets. During this period, the bankrupt does not possess any right to the asset and also has no power to transfer or otherwise deal with it. This creates a problem for a bankrupt who wishes to deal with exempt property following the bankruptcy. As the exempt property is vested in the trustee, the

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bankrupt has no right or power to transfer title to the asset to the transferee. To avoid this problem, the bankrupt should obtain a disclaimer or other document revesting property in the bankrupt before dealing with the property.96Problems can also arise where the bankrupt holds the property in trust for a beneficiary. Upon bankruptcy, legal title to the trust property vests in the trustee in bankruptcy. The bankrupt is therefore unable to administer the trust for the beneficiary until the trustee in bankruptcy transfers the property back to the bankrupt. In Ontario, the bankruptcy of a trustee is an event that permits the non-judicial replacement of the trustee.97In any event, the court has the inherent jurisdiction to appoint or replace a trustee and this has often been codified in legislation.98The trustee in bankruptcy should transfer the trust property to the new trustee if one has been appointed.

1) Trust Property

A trust is an equitable obligation that is imposed on a person (the trustee) to hold and administer the subject matter of the trust for the benefit of another (the beneficiary). The subject matter of the trust can be a property right or it can be a personal right. For example, a person who is owed money by another can create a trust of that right in favour of a beneficiary. If the person who is owed the money goes bankrupt, the personal right of action to recover the debt is not available to the creditors who prove their claims in the bankruptcy.

In order for a beneficiary to assert a trust on a bankruptcy of the trustee, the subject matter of the trust or its traceable value still must be in existence. A beneficiary will be unable to identify the trust res if the trustee has wrongfully disposed of the asset and the proceeds of disposition are untraceable. This does not mean that the beneficiary is without a remedy. The beneficiary has an action against the trustee for breach of trust, and this claim can be proven in the bankruptcy of the trustee. In doing so, the beneficiary will share pari passu with all the other creditors who have personal claims against the bankrupt.

Trusts can arise through a number of different means. Many come into existence by virtue of an intention to create a trust. These are called express trusts, and the persons who create them are called settlors. Others come into existence by operation of law. These can be either resulting trusts or constructive trusts. Finally, there are some trusts that

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are created by legislation. These are referred to as statutory trusts. The use of "implied trust" as a category of trust is not recommended because of the ambiguity of the term. It can be used to refer to intentional trusts where the intention is derived from the circumstances, but it can also be used to refer to trusts that arise by operation of law.

a) Express Trusts

In order to create an express trust, there must be a clear intention to create a trust; the subject matter of the trust must be certain; and the persons intended to be the beneficiaries must be clearly indicated.99

These are referred to as the three certainties. If any one of these conditions is not satisfied, the trust will fail. The trust must also be completely constituted. If the settlor goes bankrupt before the property is transferred to the trustee, the trust will not have been completely constituted and the creditors of the settlor rather than the beneficiaries of the trust will obtain the benefit of the property. A failure of a trust does not necessarily mean that the trustee in bankruptcy will be able to distribute the property to the creditors. If a settlor transfers property to the bankrupt in trust for another and the trust fails, the bankrupt will hold the property under a resulting trust for the settlor. In order to be recognized in bankruptcy, the trust must also comply with any formalities, such as the Statute of Frauds, that are imposed by law in respect of the transaction.

An agent who has the power to sell the property of the principal to a buyer becomes the owner of the sale proceeds. The obligation to pay money to the principal is merely a debt and not a trust. However, if the parties agree that the monies are to be held in trust, the requisite intention to create a trust exists.100Disputes will often arise over whether the parties in fact came to such an agreement. The use of the word "trust" is neither necessary nor sufficient in order to show an intention to create it.101Customers who make prepayments in respect of future deliveries of goods do not generally intend to create a trust. Despite this, a seller can unilaterally create a trust to protect the customer’s prepayments even though the customers may be unaware of its existence.102

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The subject matter of the trust must be adequately defined. Sometimes there is a problem in identifiability that manifests itself at the outset. A good example of this can be found in cases where a party purports to hold property in trust for another, but the property cannot be ascertained. Investors who have been given certificates that acknowledge their ownership of gold bullion or wine have discovered that they do not have any legal or equitable interest in the inventory of an insolvent dealer who has not set aside and appropriated items to the individual contracts with the investors.103In other cases the problem arises when, after a trust is properly constituted, the identity of the property is lost and there is no substitute property into which its value can be traced.104

b) Resulting Trusts

There are two situations where a resulting trust will typically arise. The first is where an express trust fails in whole or in part. In this case, the trustee will hold the assets on a resulting trust for the settlor. The second situation that gives rise to a resulting trust occurs when a person transfers property gratuitously to another or pays the purchase price to a vendor and directs that it be transferred into the name of another. In this case, there is said to be a presumption of a resulting trust. The presumption can be rebutted by evidence that shows that a gift was intended. The presumption of resulting trust does not operate in all cases. It does not apply to a gift from a husband to a wife or from a father to a child. In some provinces, the presumption of advancement between husband and wife has been replaced with a presumption of resulting trust.105It has been said that these two types of resulting trusts arise for essentially different reasons.106In the failed trust cases, it is said to arise automatically by operation of law without regard to the intention of the settlor ("automatic resulting trusts"). In the apparent gift cases, it is said to operate on the basis of the donor’s presumed intention to create a trust for himself or herself ("presumed intention resulting trusts").

Some commentators argue that a single unifying theory explains both situations. A resulting trust is said to arise in response to the receipt

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of an asset by someone who was not intended to receive it as a gift.107If this theory is accepted as correct, it may mean that all trusts that arise by operation of law as a response to unjust enrichment should be characterized as resulting trusts rather than constructive trusts. The transferor in these cases does not intend that the recipient should become the beneficial owner of the asset, and this activates the resulting trust. This theory has also been used to explain Quistclose trusts.108This kind of trust arises when a lender makes a loan to a borrower but imposes a restriction on the use of the funds.109The recipient holds the funds on a resulting trust if the purpose of the loan fails because the lender does not intend to give the recipient the beneficial ownership of the money.

c) Constructive Trusts

Constructive trusts arise by operation of law, but they respond to a number of different events. The constructive trust is used to reverse an unjust enrichment. At one time it was thought that this was its primary function,110but it is now accepted that it responds to other events as well.111Constructive trusts also arise in order to compel a person to give up property acquired as a result of wrongdoing112or in disparate...

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