On October 29, 2008, the Manitoba Court of Appeal delivered its decision in Re Ehrmantraut (Bankrupt), 2008 MBCA 127, affirming the Manitoba Queen's Bench judgment delivered on May 13, 2008 (the "Ehrmantraut Case").
This case involved a situation where a father wished to acquire certain improved real estate (the "Realty"). The father needed mortgage financing in order to complete his acquisition, but could not get same unless the lender also obtained the benefit of the father's son's covenant to repay the loan. The lender could have allowed the Realty to be put in the father's name alone and got a separate guarantee undertaking from the son, but instead, the lender stipulated that both father and son be put on title as owners/mortgagors. Although not stated as such in the Ehrmantraut Case judgment, one can only assume that the lender believed that the son's covenant to repay would be less likely to be avoided if the son was also shown on title as having an interest in the Realty. Financing was provided, the acquisition closed and father and son were listed on title as joint tenants.
Sometime later, the son became bankrupt and the son's trustee in bankruptcy found that the son's estate included the son's interest in the Realty or the value thereof. In support of the trustee’s position it was submitted that:
(i) a Declaration as to Possession for the Realty was sworn and signed by both the father and the son, containing declarations that they were both entitled to be registered owners in fee simple in possession of the Realty;
(ii) a Statement of Affairs was sworn by the son, declaring his joint interest in the Realty; and
(iii) by pledging his credit, the son had given good value for the joint interest in the Realty.
The father opposed, maintaining that the son's joint interest in the Realty was held as trustee for his father. In support of the father's position, it was submitted that:
(i) the Realty was leased and all of the rentals were deposited to the father's bank account (presumably, with the son not objecting to this arrangement);
(ii) the son did not advance monies either for the purchase of the Realty or to cover its maintenance costs;
(iii) the father made all of the mortgage loan payments and paid all expenses required for/related to the Realty;
(iv) the father paid income tax on the rental income derived from the Realty; and
(v) the arrangement between father and son was simply that the son was "lending his (the son's) name to enable me (the father) to obtain financing and that I (the father) would pay all the expenses for the purchase of (the Realty) and would be the beneficial owner of (the Realty)".
After reviewing the evidence, the Madam Justice McKelvey of the Court of Queen’s Bench (the “Court) noted that there was also no evidence of a (written) trust agreement/arrangement/declaration and no caveat had been registered against the title to the Realty giving notice of the father's alleged trust.
The Court held that although the above-described evidence (including the father's evidence of the intentions of himself and his son) suggested the possibility of a trust arrangement, there was insufficient evidence presented to convince the Court to hold that a trust did in fact exist. The Court suggested certain other possible indicia which could have been put forward (which were not presented by either the father or the trustee in bankruptcy) to argue for the existence of a trust, which included an affidavit from the son, an affidavit from the lawyer who handled the Realty acquisition transaction, an affidavit from an individual employed by the lender at the financial institution involved, an acknowledgement that the son received independent legal advice, an indemnification agreement by the father covering the son should the son be called upon to pay any of the mortgage payments and/or a caveat registered against the title to the Realty giving notice of the trust's existence. The finding of no trust meant that the son's interest in the property was both legal and equitable, and was thus available to the son's creditors in the son's bankruptcy. The Court also found that the son had given valuable consideration to the father (for acquiring his interest in the Realty) by pledging his credit as a mortgagor/owner.
The Ehrmantraut Case suggests that where someone is to be on title as an owner (or part owner) of real property and the arrangement is that such person is not to have any true or beneficial ownership interest in the property, the trust arrangement should be clearly documented and the beneficial owner (or owners) should register notice (by caveat) of their true or beneficial ownership interest in the property.
Express written trusts (and frequently trust notification caveats) are in fact frequently put in place by solicitors acting for one or more true or beneficial owners who decide to take title to real property in the name of a bare trustee corporation. However, in the Ehrmantraut Case, the son's bankruptcy trustee raised another challenge to the alleged trust's existence which frankly, this writer has never heard of or considered. This argument is based on the "indefeasibility of title/ownership" rule found in Section 59(1) of The Real Property Act (Manitoba)(the "MRPA"). Section 59(1) is, in this writer's opinion, at the very core and is of the essence of the MRPA's rules and concepts relating to the ownership of titled real property as it deals with the essential nature and extent of real property ownership. It is worthwhile to set it out in full:
59(1) Every certificate of title, so long as it remains in force and uncancelled, is conclusive evidence at law and in equity, as against Her Majesty and all persons, that the person named in the certificate is entitled to the land described therein for the estate or interest therein specified, subject, however, to the right of any person to show that the land is subject to any of the exceptions or reservations mentioned in section 58, or to show fraud wherein the registered owner, mortgagee, or encumbrancer, has participated or colluded and as against the registered owner, mortgagee, or encumbrancer; but the onus of proving that the certificate is so subject, or of proving the fraud, is upon the person who alleges it.
The trustee in bankruptcy argued on this point that since the existence of a trust is not specified as an exception to the declaration of ownership rights in Section 59(1), registered ownership by a person with a title under the MRPA cannot in law be subject to a trust (for the benefit of one or more off-title owners). This argument was bolstered by reference to certain rules/requirements in Sections 49(2) and 81(1) of the MRPA, which say, in effect, that a Land Titles Office is not, except in certain specified situations which don't concern us here, to make entries on a title or in the register of any trusts or the existence of any trusts, whether "expressed, implied or constructive".
Fortunately for the sake of persons (and their counsel) who have utilized and will in the future wish to continue to utilize express (typically "bare") trusts for the holding of title to real property, the Court appeared to disagree with this argument. The writer uses the word "appeared" here because the Court of Appeal did not specifically deal with this issue, and the trial judge seems to have dealt with the issue somewhat inconsistently.
Notwithstanding the holding in the Ehrmantraut Case - and perhaps due to the Court's lack of unequivocal pronouncements on the effect of Section 59(1) of the MRPA in the context of trusts - the writer is concerned that either in Manitoba or in another Canadian jurisdiction which has statutory language dealing with titled ownership similar to that quoted above, sometime in the future, a court may hold that the combination of these three sections does in fact bar the recognition or imposition of a trust on titled real property. Current Manitoba Land Titles system practice is in fact to permit a caveat to be registered against a title giving notice of a trustee -beneficial owner(s) relationship. But is such practice in fact contrary to Sections 49(2) and 81(1) of the MRPA? Presumably, the basis of the rules in Sections 49(2) and 81(1) is that the government doesn't want Land Titles personnel to have to review the (perhaps lengthy and complex) documents creating express trusts, whether with respect to the existence of the trust or as to the trustees' rights and powers thereunder so as to ensure that a particular dealing by the registered owner is in compliance with the obligations of the trustee(s) under the trust.
Perhaps the MRPA could be amended so as to confirm current Land Titles practice, but make it clear that registration of a caveat giving notice of a beneficial owner-trustee relationship (i) does not obligate the Land Titles system to review and ensure compliance with the limitations and powers on and held by the trustees (or even to ensure the existence of the trust), and (ii) does not of itself confirm or validate the existence of the "alleged" trust, nor constitute a confirmation that any particular dealing with the property by the registered owner thereof (the "alleged" trustee(s)) is authorized under the terms of the trust, these matters to be capable of being challenged by all interested parties. Currently, this is the situation with caveats in that someone who wishes to challenge the validity of the right, claim, or interest of which a registered caveat gives notice is entitled to bring the matter before a Court and argue the merits of the right, claim or interest in that forum.