Unauthorized dispositions of trust property: tracing in Quebec law.

• Author: Smith, Lionel
• Position: The Civil Law Trust/La Fiducie en Droit Civil

The trustee of a Quebec trust is an administrator of the property of others, with full administration. As such, he holds a wide range of powers over the trust property; typically, his powers will exceed his authority, in the sense that it will be possible for him to make unlawful dispositions of the trust property. In such a case, he will be liable of course, but sometimes, particularly if the trustee is insolvent or absent, it will be important to understand the effects of the unauthorized dispositions on the trust property. For example, it may be possible for beneficiaries or other interested parties to annul a disposition of trust property; in this way, the property may be restored to the trust patrimony. Somewhat more difficult is the case in which the trustee has improperly disposed of trust property in exchange for some other property, in an attempt to misappropriate trust assets and turn them to his own benefit. If it is not possible to annul the disposition, might it be possible to claim that the proceeds of this unauthorized disposition are themselves held in trust? This paper examines the extent to which the idea of real subrogation can be used to protect the trust patrimony. Although the Supreme Court of Canada has suggested that Quebec law does not have a general principle of real subrogation, the author argues that this principle has a role to play in protecting universalities of law and that it can appropriately be invoked in the context of unauthorized dispositions of trust property.

Le fiduciaire d'une fiducie quebecoise est un administrateur du bien d'autrui, charge de la pleine administration. A ce titre, il est dote d'un vaste eventail de pouvoirs sur les biens en fiducie; il est pourtant possible que le fiduciaire fasse des dispositions illegales des biens en fiducie et outrepasse ses pouvoirs. Il engagera alors sa responsabilite personnelle, mais dans les cas ou le fiduciaire est insolvable ou absent, il peut etre important de connaitre egalement les effets de ces dispositions non autorisees sur les biens en fiducie. Par exemple, les beneficiaires ou toutes autres parties interessees peuvent faire annuler une disposition illegale; de cette facon, les biens sont remis dans le patrimoine fiduciaire. Par contre, si le fiduciaire a dispose d'un bien en fiducie en echange d'un autre bien, dans le but de s'emparer des biens en fiducie et d'en profiter personnellement, la situation devient plus complexe. S'il n'est pas possible d'annuler la disposition, est-il possible de pretendre que le produit de cette disposition non autorisee entre lui-meme dans le patrimoine fiduciaire? Ce texte examine comment la subrogation reelle peut etre utilisee pour proteger le patrimoine fiduciaire. Bien que la Cour supreme du Canada ait suggere que le droit quebecois ne connait pas de principe general de subrogation reelle, l'auteur soutient que la notion a un role a jouer dans la protection des universalites de droit, et qu'elle peut justement etre mise en cuvre dans le contexte des dispositions non autorisees des biens en fiducie.

Introduction I. Recovery of Original Property II. Recovery of Proceeds III. Real Subrogation A. Definiton and Examples B. Kinds of Real Subrogation C. Real Subrogation and the Quebec Trust Patrimony Conclusion Introduction

The coming into force of the Civil Code of Quebec (CCQ) brought with it a wholly renewed trust institution. Given that robust protection for beneficiaries is an important aspect of any law of trusts, one aspect of the new regime that attracted some initial commentary was whether the Quebec trust could admit of a form of tracing. John Brierley argued that it could, by the civilian technique of real subrogation. (1) But very little has been written since then, and there is no significant jurisprudence. This paper seeks to explore some of these possibilities, albeit in a preliminary way.

When a trust is managed well, there is usually little cause for complaint. But a trust can be badly managed by a trustee in a whole range of ways. This paper is concerned with one particular kind of mismanagement: the unlawful disposition of trust assets. Typically, this involves an attempt by a trustee to misappropriate the value held in trust, either for his own benefit or for the benefit of someone else.

There are two distinct problems that must be addressed in this context. One is the problem of trust assets improperly transferred to another person: can they be recovered? The other is the problem of an asset that has been improperly acquired by using trust assets: can those new assets be treated as trust property?

There is a tendency to conflate these two issues, for example by treating them as variations on a single question: in light of what has happened to the trust property, can it be recovered in whatever guise it bears now? But they are juridically distinct possibilities. This can be illustrated by considering a simple example. The trustee misappropriates $10,000 from the trust and uses it to buy a car, registering himself as the owner. We may be tempted to think merely in terms of a single question: can the misappropriated property be traced? But there are two distinct possibilities in this scenario. One is to argue that the $10,000, even though it has been paid to another person, is recoverable as property that still belongs to the trust. The other is to argue that the car, having been acquired with trust property, is itself trust property. Not only are they distinct, they are probably theoretically inconsistent with each other; on ne peut pas avoir le beurre et l'argent du beurre.

When we are following original assets into different hands and trying to recover them, we may call this "following". (2) When we are attempting to lay claim to assets that have never been trust assets, on the basis that they were acquired with trust assets, we are doing something different. In this paper, this is what is meant by a claim that is based on the process of tracing. (3)

The focus in this paper is on trusts. However, if tracing is available in the context of misappropriated trust property, it is quite possible that the same technique could operate in other contexts; for example, where a mandatary misuses property belonging to the mandator, or an administrator of the property of a natural person misuses property under administration.

1. Recovery of Original Property

   The main technique for recovering trust property that has been improperly disposed of will be via the annulment of the relevant disposition.

   If the trustee were simply to give trust property away, for example, to a family member, the donation would clearly be null. The reason is that, except in very limited circumstances, an administrator of the property of others has no power to make gifts of the property being administered. (4) Although the CCQ is not entirely clear, this appears to be a relative nullity. (5)

   Once the donation is annulled, the general conclusion is that the ownership of the property in question will return to the trust patrimony. (6) The regime of restitution of prestations will apply. (7) One interesting question is that of who can demand annulment of such a juridical act. This standing belongs to "the person in whose interest" the nullity is established; (8) normally, this means a person who was party to the juridical act in question. But in the case of the trust, the solution is more complicated. The beneficiaries are not parties to the act that is null, but the nullity exists to protect them. It seems to follow that they are able to invoke it. (9) It appears that the nullity may also be invoked by those to whom the CCQ gives powers of supervision over the trust. (10)

   Let us take a slightly more difficult case: not a donation, but a sale. Moreover, let us assume that the sale is made to the trustee: to use the earlier example, the trustee misappropriates $10,000 from the trust and uses it to buy a car. We may assume that the sale is unlawful, being either contrary to the terms of the trust or made in breach of the trustee's duty of loyalty. Either of these conditions is enough to make the sale null, in principle. (11) But it is likely to be much harder to annul the sale, for a variety of reasons. Of course, if the seller of the car was or should have been aware of the trustee's breach of trust, the sale can be annulled, and the money can be recovered according to the regime for restitution of prestations, with such a seller surely treated as one in bad faith. But the other possibility is that the...