The boundaries of corporate law and trust law: an analysis of Locking v. McCowan.

• Author: Anand, Anita
• Position: Ontario

There is an increasing trend among real estate investment trusts (REITs) to employ corporate law duties in formulating the duties of trustees. We contend that this approach represents a fundamental misunderstanding of the trust versus corporate law. To illustrate this point, we examine the case of Locking v. McCowan, a decision that we claim underscores the conceptual uncertainty regarding the extent to which corporate law applies in the income trust context. We argue that the case takes into account the difference between trusts and corporations in certain aspects of the decision, while, in others, it blurs the distinction between the two.

In support of our argument, we note that income trusts lack a separate legal personality and are thus fundamentally different from corporations. The law governing each form therefore is not, and ought not be, identical. To apply corporate law to the interpretation of trustees' duties fails to acknowledge the absence of a distinct legal entity in the trust context, and the historically fundamental fiduciary relationship between trustees and beneficiaries (i.e., unitholders, in this context). We favour greater clarity in the drafting of the declarations of trust (DOTs) to reflect an understanding that corporate law fiduciary duties should not ground trustees' duties. Simply importing corporate law fiduciary duties into the DOT undermines the certainty on which DOTs, and thus the income trust market, should operate.

Il y a une tendance croissante, au sein des fiducies de placement immobilier, a utiliser des obligations de droit corporatif pour etablir les obligations des fiduciaires. Nous soutenons que cette pratique trahit une mauvaise comprehension de la distinction separant la fiducie du droit corporatif. Pour illustrer cette these, nous analysons le cas de Locking c. McCowan, une decision qui, a notre sens, revele l'incertitude conceptuelle concernant l'etendue de l'application du droit corporatif dans le contexte des fiducies de revenu. Le jugement prend en consideration les differences entre les societes et les fiducies sur certaines questions alors que, sur d'autres, il brouille la frontiere existant entre les deux.

A l'appui de notre these, nous notons que les fiducies de revenu n'ont pas de personnalite juridique distincte et sont donc fondamentalement differentes des societes. La loi regissant chaque forme n'est donc pas, et ne devrait pas etre, identique. L'application du droit des societes a l'interpretation des obligations des fiduciaires ne reconnait pas l'absence d'entite juridique distincte dans le contexte de la fiducie et la relation fiduciaire historique et fondamentale entre les fiduciaires et les beneficiaires (c'est-a-dire les porteurs de parts, dans ce contexte). Nous sommes en faveur d'une plus grande clarte dans la redaction des declarations de fiducie (DDF) afin de rendre compte du fait que les devoirs fiduciaires de droit corporatif ne devraient pas fonder les obligations des fiduciaires. Le simple fait de transposer des obligations fiduciaires de droit corporatif dans la DDF compromet la certitude sur laquelle les DDF, et donc le marche des fiducies de revenu, se doit de fonctionner.

Introduction I. Income Trust Governance in Context II. The Case A. The Officer's Duties B. The Trustees' Duties C. The Breach of Trust Claim III. Future Directions Conclusion Introduction

Locking v. McCowan (Locking) stems from a motion to strike a proposed class action brought by unitholders against the trustees of a real estate investment trust (REIT), a form of unincorporated business entity. (1) The decision interprets the REIT's organizational document, known as a "declaration of trust" (DOT), in addressing two main issues: the scope of trustees' duties and unitholder remedies. Locking raises novel questions regarding the governance of income trusts. What does it mean for trustees to owe duties to a non-legal entity? Should remedies available to shareholders of a corporation be available to unitholders of income trusts?

During the relevant time period, the REIT in question--the TSX-listed Partners REIT--was governed by a board comprised of three trustees. (2) The REIT purchased three properties at the behest of its interim CEO, who failed to disclose to the trustees or unitholders that he had both a business and personal relationship with the vendor of the properties. As soon as his conflict came to light, the transaction was set aside and Partners REIT's unit price declined by more than thirty per cent. The representative plaintiff, a unitholder of the REIT, sued for the loss suffered from the decline in unit price because of this improper transaction. The plaintiff claimed, inter alia, that the interim CEO and the trustees had breached their fiduciary duty to unitholders and that the trustees were in breach of trust.

Justice Belobaba of the Ontario Superior Court of Justice considered whether these claims constituted viable causes of action that could form the basis of a class proceeding on the motion to strike at issue. (3) Central to the decision was his interpretation of section 10.5 of the DOT. This provision required the trustees to "act honestly and in good faith with a view to the best interests of the Trust and ... to exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances." (4) The provision further provided that the duties and standard of care of the trustees "are intended to be similar to, and not to be any greater than, those imposed on a director of a corporation governed by the Business Corporations Act (Ontario)." (5)

Justice Belobaba held that the breach of fiduciary duty claim had no chance of success and should therefore be struck down. (6) First, he considered the fiduciary duty of the CEO, an officer but not a trustee. Justice Belobaba reasoned that the fiduciary duties of officers are similar to those of corporate officers, and relied on the decisions of the Supreme Court of Canada in BCE Inc. v. 1976 Debentureholders (BCE7) and Peoples Department Stores Inc. (Trustee of) v. Wise (Peoples8) to conclude that these duties are not owed to any individual unitholder. He wrote:

It is well established in the corporate context that an officer's duties are owed "to the corporation, and only to the corporation". In the context of a publicly traded income trust such as the REIT, an officer's duties are owed to the REIT itself (technically, to the trustees in their capacity as trustees of the REIT). If Mr. McCowan owed duties exclusively to the REIT and no direct duties to the unit-holders, it follows that he owed no fiduciary duties to the unit-holders. (9) Since the CEO did not owe a fiduciary duty to unitholders, their suit against him for breaching this duty could not proceed. (10)

Second, Justice Belobaba considered the duties of the trustees. The DOT provided that the duties of the trustees are to be "similar to, and not ... greater than" those imposed on corporate directors. (11) In Justice Belobaba's estimation, to hold that the trustees owed fiduciary duties to the unitholders would be to impose duties that are greater than those imposed on directors of corporations. (12) He concluded:

The plaintiffs allegations that trustees Weinberg, Feldman and Charlebois owe a fiduciary duty to the unit-holders would impose a legal obligation that would be "greater than" the duties imposed on a director of an Ontario corporation and thus contrary to section 10.5 of the DOT. This is reason enough for my conclusion that it is plain and obvious that the unit-holders' breach of fiduciary duty claim against the three trustees is not a reasonable cause of action and is doomed to fail. (13) Finally, Justice Belobaba found that the essential elements of a fiduciary duty to unitholders, including language in the DOT that would obligate the trustees to act in the best interests of unitholders as well as those of the REIT, were absent. (14) In addition, trustees could not owe duties to both the trust and its unitholders because this would present the possibility of conflicting fiduciary duties. (15)

Despite striking down the claim of fiduciary breach, Justice Belobaba allowed the breach of trust claim to proceed. The plaintiff asserted this claim in two parts, arguing that one of the trustees failed to act honestly, in good faith and in the best interests of the REIT, while the remaining two trustees did not act with the degree of care, diligence and skill of a reasonably prudent person in comparable circumstances. The trustees argued that a plain reading of the DOT--which provides that unitholders enjoy only those rights "expressly conferred" therein and any duties owed by the trustees are not to the unitholders but to the trust (16)--implies that the unitholders do not have standing to bring an action for damages. Yet, Justice Belobaba pointed to other provisions of the DOT, including one indicating that the relationship of the unitholders to the trustees is "solely that of beneficiaries to the Trust." (17) In other words, simply because the provisions relating to the fiduciary duty and the duty of care do not indicate that duties are specifically owed to unitholders does not mean that the unitholders have no rights under the DOT--they have rights as beneficiaries of the trust.

Finally, on the issue of remedies, the trustees argued that the unitholders were legally blocked from suing the trustees because of the rule in Foss u. Harbottle, (18) which holds that individual shareholders have no cause of action for wrongs committed against the corporation. Any suit for such losses must be brought by the corporation itself (via management) or by way of a derivative action. (19) In holding that this issue should not be determined on a motion to strike, (20) Justice Belobaba appeared to agree with the plaintiffs argument that the losses stemming from the improper transaction were sustained...