Gold v. Rosenberg

Gold v. Rosenberg
Collection
Supreme Court Judgments
Date
1997-10-30
Report
[1997] 3 SCR 767
Case number
25064
Judges
La Forest, Gérard V.; Sopinka, John; Gonthier, Charles Doherty; Cory, Peter deCarteret; McLachlin, Beverley; Iacobucci, Frank; Major, John C.
On appeal from
Ontario
Subjects
Trust
Notes
SCC Case Information: 25064
Decision Content
Gold v. Rosenberg, [1997] 3 S.C.R. 767
Jeffrey Lorne Gold Appellant
v.
Primary Developments Limited and
The Toronto‑Dominion Bank Respondents
Indexed as: Gold v. Rosenberg
File No.: 25064.
1997: May 21; 1997: October 30.
Present: La Forest, Sopinka, Gonthier, Cory, McLachlin, Iacobucci and Major JJ.
on appeal from the court of appeal for ontario
Trusts and trustees ‑‑ Breach of trust ‑‑ Liability of strangers to trust ‑‑ Knowing assistance ‑‑ Knowing receipt ‑‑ Customer giving bank loan guarantee supported by collateral mortgage on trust property ‑‑ Whether bank knowingly assisted in breach of trust ‑‑ Whether bank liable for knowing receipt of trust property ‑‑ Whether bank received trust property for its own use and benefit ‑‑ Whether bank in breach of its duty to inquire.
A testator died in 1985 and named his son, R, and his grandson, the appellant G, as executors and equal beneficiaries of the residue of his estate. The assets of the estate consisted primarily of commercial real estate held by two companies. Shortly after the testator’s death, G signed a general power of attorney permitting R to continue his management of the estate companies, in which he was closely involved. The testator, the estate companies, R and a storage company owned by R all banked at the respondent bank. Overseeing all of these accounts was a single account manager, who was familiar with the details of the testator’s will and had a copy of the power of attorney. In 1989 the bank agreed to make a loan to the storage company on condition that it received a guarantee from P, one of the estate companies, supported by a second collateral mortgage over property owned by P and a postponement of a mortgage held by the other estate company in favour of a new mortgage to the bank. The law firm which acted for the estate, the estate companies, R, the storage company and, on certain matters, the bank prepared a resolution of the directors of P and also drew up the form for a guarantee. R signed both documents. The law firm sent an opinion letter to the bank stating that the guarantee complied with all legal requirements. The bank advanced its loan to the storage company, and G’s signature was subsequently obtained on the directors’ resolution. G later revoked the power of attorney and issued a statement of claim against R, P, the bank and the law firm seeking a declaration that the guarantee given to the bank by P was invalid and unenforceable. The bank cross‑claimed against P, seeking enforcement of the guarantee. The trial judge imposed a constructive trust on the bank in favour of G and declared that the guarantee, the collateral mortgage and the postponement of the mortgage were unenforceable. The Court of Appeal allowed the bank’s appeal and dismissed G’s claim against the bank.
Held (La Forest, Cory and Iacobucci JJ. dissenting): The appeal should be dismissed.
Per Sopinka, McLachlin and Major JJ.: Assuming the theory of knowing receipt liability should be entertained even though the case was presented and dealt with in both the trial court and the court of appeal as a knowing assistance case, when a bank receives a guarantee supported by a collateral mortgage on trust property, it has not received the trust property to its own use and benefit. In the context of knowing receipt cases, to receive trust property means, at a minimum, to take the trust property into one’s possession. A guarantee is a contract whose performance is contingent on the default of the principal debtor. If the guarantor supports the guarantee with a mortgage on real property, the creditor only enjoys, at best, a contingent interest in that property.
Moreover, even if this is properly viewed as a knowing receipt case, the bank, knowing what it knew, acted reasonably in the circumstances and therefore cannot be found liable. An honest person with knowledge of the facts of this case would not have made further inquiries. Presumably the lawyers and the accountants who acted on the transaction would have affirmed its fairness if asked. If G had been asked about the guarantee, he would hardly have questioned it in view of the fact that he signed the resolution.
In certain circumstances, a third party in the position of the bank will not have discharged its duty to inquire unless the guarantor has been advised to obtain independent legal advice. When the transaction is clearly detrimental to the person offering security and the relationship between that person and the principal debtor is particularly close, the law presumes undue influence on the part of the principal debtor. A relationship that is more distant will raise less suspicion of undue influence, however, even if the transaction is apparently unfavourable to the guarantor. Consequently, less may be required to satisfy an honest and reasonable person that the surety or guarantor is aware of the legal implications of the proposed transaction. At the time G signed the resolution he had three years of university education in which he had taken courses in business, economics and accounting. The purpose of the guarantee was explained to him by R. In the circumstances, advising G to obtain independent legal advice goes beyond what is expected of an honest and reasonable banker.
Per Gonthier J.: While this case is one of knowing receipt of trust property, as found by Iacobucci J., the bank, knowing what it knew, acted reasonably in the circumstances, for the reasons given by Sopinka J.
Per La Forest, Cory and Iacobucci JJ. (dissenting): A breach of trust may give rise to liability in a person who is a stranger to the trust under the doctrine of “knowing assistance”. As the name implies, the plaintiff must prove not only that the breach of trust was fraudulent and dishonest, but also that the defendant participated knowingly in that breach of trust. The knowledge requirement for this type of liability is actual knowledge. Assuming without deciding that R committed a dishonest and fraudulent breach of trust and that the bank participated in that breach of trust, G’s claim in knowing assistance fails because of the failure to prove that the bank had actual knowledge of R’s fraud. The opinion letter undoubtedly provided comfort to the bank that the guarantee was not tainted by fraud, and it therefore cannot be said that the bank had actual knowledge that the guarantee was obtained in breach of trust.
Depending upon considerations of notice, equity may also impose liability if the defendant received, in his or her own right, property obtained through breach of trust. The essence of such a “knowing receipt” claim is that, by receiving the trust property, the defendant has been enriched at the plaintiff’s expense. The claim, accordingly, falls within the law of restitution. A court may impose liability for knowing receipt even if the defendant acted with something less than actual knowledge of the breach of trust. The defendant cannot retain the property in question if it was acquired in circumstances which would have alerted a reasonable person to the possibility of a breach of trust. The claim in knowing receipt is essentially a proprietary one and a recipient of trust property may be liable as a constructive trustee if, having notice of a possible breach of trust, he failed to make the appropriate inquiries.
Even if one takes the position that the guarantee provided by P, supported by a collateral mortgage over property owned by P, does not constitute trust property, the benefit conferred on the bank and the resulting loss in value suffered by the estate are sufficient to bring the guarantee within the knowing receipt category of liability. Furthermore, in the present action, the bank has attempted to enforce the guarantee against P. If the guarantee is enforced, then the bank will clearly receive property.
The guarantee was subject to a trust in favour of G, and the bank took possession of it in its own right in breach of trust. The first two elements of knowing receipt have thus been made out. Finally, the bank did not acquire the property as a bona fide purchaser for value without notice as the circumstances were sufficiently suspicious to put it on inquiry. The opinion letter stating that the guarantee complied with all legal requirements does not satisfy the bank’s obligation to make reasonable inquiry. Since the bank knew that the law firm was acting on behalf of all parties, it knew that the firm could not have given G independent legal advice with regard to signing the directors’ resolution which authorized the guarantee. Accordingly, the bank is fixed with notice of the breach of trust and therefore takes the guarantee subject to G's equity. For these reasons, the bank cannot enforce the guarantee against P.
Cases Cited
By Sopinka J.
Distinguished: Bertolo v. Bank of Montreal (1986), 57 O.R. (2d) 577; referred to: Citadel General Assurance Co. v. Lloyds Bank Canada, [1997] 3 S.C.R. 805; Baden v. Société Générale pour Favoriser le Développement du Commerce et de l’Industrie en France SA, [1992] 4 All E.R. 161; Barclays Bank plc v. O’Brien, [1993] 4 All E.R. 417.
By Iacobucci J. (dissenting)
MacDonald v. Hauer, [1977] 1 W.W.R. 51; Air Canada v. M & L Travel Ltd., [1993] 3 S.C.R. 787; Citadel General Assurance Co. v. Lloyds Bank Canada, [1997] 3 S.C.R. 805; Barnes v. Addy (1874), L.R. 9 Ch. App. 244; Agip (Africa) Ltd. v. Jackson, [1990] 1 Ch. 265; Nelson v. Larholt, [1948] 1 K.B. 339; Royal Brunei Airlines Sdn. Bhd. v. Tan, [1995] 3 W.L.R. 64; Carl Zeiss Stiftung v. Herbert Smith & Co., [1969] 2 Ch. 276; In re Montagu's Settlement Trusts, [1987] 1 Ch. 264; Carl B. Potter Ltd. v. Mercantile Bank of Canada, [1980] 2 S.C.R. 343; Cartwright v. Lyster, [1934] 2 D.L.R. 166; Canadian Pacific Air Lines Ltd. v. Canadian Imperial Bank of Commerce (1987), 27 E.T.R. 281; Barclays Bank plc v. O’Brien, [1993] 4 All E.R. 417; Credit Lyonnais Bank Nederland NV v. Burch, [1997] 1 All E.R. 144; Bertolo v. Bank of Montreal (1986), 57 O.R. (2d) 577.
Authors Cited
Halsbury’s Laws of England, vol. 20, 4th ed. London: Butterworths, 1993 (reissue).
Harpum, Charles. “The Stranger as Constructive Trustee” (1986), 102 L.Q.R. 114 and 267.
McGuinness, Kevin Patrick. The Law of Guarantee: A Treatise on Guarantee, Indemnity and the Standby Letter of Credit, 2nd ed. Scarborough, Ont.: Carswell, 1996.
Oxford English Dictionary, 2nd ed. Oxford: Clarendon Press, 1989, “receive”.
APPEAL from a judgment of the Ontario Court of Appeal (1995), 25 O.R. (3d) 601, 129 D.L.R. (4th) 152, 86 O.A.C. 116, 9 E.T.R. (2d) 93, [1995] O.J. No. 3156 (QL), reversing a decision of the Ontario Court (General Division), [1993] O.J. No. 2994 (QL), imposing a constructive trust on the defendant bank. Appeal dismissed, La Forest, Cory and Iacobucci JJ. dissenting.
John D. Brownlie, Q.C., and John J. Lucki, for the appellant.
No one appeared for the respondent Primary Developments Limited.
R. Ross Wells and Sherry A. Currie, for the respondent The Toronto‑Dominion Bank.
//Iacobucci J.//
The reasons of La Forest, Cory and Iacobucci JJ. were delivered by
1 Iacobucci J. (dissenting) -- This appeal involves the question of when a person will be liable for the knowing receipt of trust property.
1. Facts
2 Abraham Rosenberg (“the testator”) died on March 30, 1985. He named his son, Maurice Rosenberg (“Rosenberg”), and his grandson, the appellant Jeffrey Gold, as executors and equal beneficiaries of the residue of his estate. The assets of the estate consisted primarily of commercial real estate held by two companies: Primary Developments Ltd. and Existing Enterprises Ltd. (the “estate companies”).
3 Both during the testator’s life and after his death, Rosenberg was closely involved in the running of the estate companies. Gold, however, has had no involvement in the estate’s business.
4 In 1985, shortly after the testator’s death, Rosenberg asked Gold to sign a general power of attorney which would permit Rosenberg to continue his management of the estate companies. Gold agreed.
5 Rosenberg had other commercial interests besides the estate companies. Together with his wife, he owned all of the shares of Trojan Self-Storage Mini-Warehouse Ltd. (“Trojan”).
6 The testator, the estate companies, Rosenberg and Trojan all banked at the respondent Toronto-Dominion Bank. Overseeing all of these accounts was a single account manager, Kenneth Slack. Mr. Slack was familiar with the details of the testator’s will and had a copy of Gold’s power of attorney.
7 In July of 1989, the Bank was trying to obtain repayment of a $300,000 loan made to Rosenberg personally and of a US $130,000 loan made to one of Rosenberg’s companies. At the same time, Rosenberg wanted to secure substantial new loans, totaling approximately $3.9 million. He and Mr. Slack eventually settled upon a mutually satisfactory arrangement which would use the assets of the two estate companies to repay Rosenberg’s personal indebtedness and to secure the new loan. The agreement included the following particulars, relevant to the present appeal:
The Bank agreed to make the $3.9 million loan to Trojan on the condition that the Bank receive a $1.2 million guarantee from one of the estate companies. This guarantee would be supported by the following:
(i) a $1.2 million second collateral mortgage over property owned by Primary, at 156 Columbia Street, Waterloo; and
(ii) a postponement of a $200,000 mortgage held by Existing over a property owned by Trojan, in favour of a new $4 million mortgage to be given by Trojan to the Bank.
8 A Kitchener law firm, Sills, Madorin, which was a defendant at trial (and which did not appeal the judgment against it), provided legal counsel to the following persons: the estate; Primary; Existing; Rosenberg; Trojan; and, on certain matters, the respondent Bank.
9 Putting the loan agreement into effect required Gold’s signature on certain documents, most notably on a Primary directors’ resolution, authorizing the guarantee. On July 28, 1989, the law firm prepared a Resolution of the Directors of Primary and also drew up the form for a $1.2 million guarantee. Rosenberg signed both documents on July 28, 1989. Gold signed the Directors’ resolution sometime between September 13, 1989 and October 20, 1989.
10 In connection with the guarantee, the law firm sent an opinion letter, dated August 1, 1989, to the Bank. The letter said:
The authorization, execution, issuance and delivery of the said Guarantee by the Corporation does not conflict with or contravene any terms, conditions or provisions of any law or agreement to which the Corporation is subject or to which the Corporation is a party.
In a cover letter to the opinion letter the law firm indicated that the Directors’ resolution had to be signed by both Gold and Rosenberg and that Gold had not yet signed it.
11 Nonetheless, the Bank proceeded to advance its new loans to Trojan. Gold’s signature was subsequently obtained on the Directors’ resolution.
12 In November 1989, Gold revoked the power of attorney executed in favour of Rosenberg. On January 14, 1993, Gold issued a statement of claim against Rosenberg, Primary, the Bank and the law firm of Sills, Madorin. Gold sought a declaration that the $1.2 million guarantee given to the Bank by Primary was invalid and unenforceable. In the alternative, Gold claimed indemnity for any loss which he might suffer if the guarantee were enforced. The Bank cross-claimed against Primary, seeking enforcement of the guarantee.
2. Judgments Below
A. Ontario Court of Justice (General Division), [1993] O.J. No. 2994 (QL)
13 In the view of Haley J., the Bank’s liability turned on whether or not it had knowingly assisted in a breach of trust. Citing MacDonald v. Hauer, [1977] 1 W.W.R. 51 (Sask. C.A.), the trial judge said that, in order to recover damages for knowing assistance, the plaintiff must prove the following:
(1) assistance by the defendant of a nominated trustee;
(2) with knowledge;
(3) in a dishonest and fraudulent design on the part of the nominated trustee.
With regard to the third element above, Haley J. explained that the “dishonest and fraudulent design” need not amount to a crime. Rather, the test is whether equity would regard the plan as “morally reprehensible” (para. 12).
14 Turning to the facts of the case, Haley J. found that the testator’s will created a trust and that Rosenberg was one of the trustees. She also found that the relationship between Rosenberg and Gold was such as to impose upon Rosenberg fiduciary duties (at para. 13):
Rosenberg, acting under a Power of Attorney given to him by Gold for his executorship, owed a fiduciary duty to Gold under the Power of Attorney and also to him as a 50% beneficiary of the estate.
15 The trial judge went on to hold that Rosenberg had breached his fiduciary duty in three ways:
(1) By causing Primary to give a $1.2 million guarantee in favour of the Bank;
(2) By causing Primary to secure its guarantee by a second collateral mortgage against its property at 156 Columbia Street, Waterloo; and
(3) By causing Existing Developments to postpone its mortgage, in the amount of $200,000, on a Trojan property, in favour of a collateral second mortgage held by the Bank.
In the opinion of the trial judge, these transactions were “fraudulent and dishonest” and, therefore, the case fell within the law of knowing assistance.
16 Turning next to the issue of the Bank’s liability, Haley J. held that, by making the necessary arrangements for the guarantee-related transactions, the Bank assisted Rosenberg in his fraudulent and dishonest scheme. Thus, all that remained to be determined was whether the Bank had offered this assistance with the requisite degree of knowledge so as to give rise to liability. The trial judge said (at para. 14):
The crucial element to be considered is whether the bank at the time it assisted had knowledge, either actual or imputed that:
(a) the scheme was dishonest and fraudulent;
(b) it was assisting Rosenberg in perpetrating the dishonest and fraudulent scheme.
17 In carrying out this inquiry, the trial judge focused on Kenneth Slack, the Toronto-Dominion account manager. In particular, Haley J. highlighted the following evidence:
(1) Slack was familiar with the details of the testator’s will.
(2) He knew that Gold played no role in the management of the estate.
(3) He knew that Gold had executed a Power of Attorney in favour of Rosenberg.
(4) He knew that the guarantee and its related transactions could not possibly benefit Gold.
Based on all of the above, the trial judge concluded that the Bank had actual knowledge of Rosenberg’s fraudulent and dishonest breach of trust. She said (at para. 66):
On the basis of all of the knowledge that Slack had in July 1989, when the guarantee was given, and hence that the bank had, I find that the bank knew that what Rosenberg as Trustee was doing, was dishonest and fraudulent. . . .
18 Accordingly, Haley J. imposed a constructive trust on the Bank in favour of Gold, saying (at para. 75):
. . . I find that equity should fix the bank with a constructive trust in favour of Jeffrey Gold of those assets of the estate representing his 50% beneficial interest by declaring that the $1.2 million guarantee given to the Bank by Primary is unenforceable as are the collateral mortgage on 156 Columbia Street in favour of the bank and the postponement of the Existing third collateral mortgage on 555 Fairway Drive which were given as part of the guarantee transaction.
B. Ontario Court of Appeal (1995), 25 O.R. (3d) 601
19 Like the trial judge, the Court of Appeal proceeded on the basis that liability turned solely on whether or not the defendant Bank had knowingly assisted Rosenberg in a fraudulent and dishonest breach of trust. Writing for a unanimous court, Laskin J.A. applied the test for knowing assistance laid down in Air Canada v. M & L Travel Ltd., [1993] 3 S.C.R. 787. According to Air Canada, in order to impose liability on the Toronto-Dominion Bank for knowing assistance, the plaintiff would have to prove the following:
(1) That Rosenberg was a trustee of the property of Primary;
(2) That, in causing Primary to give the guarantee, Rosenberg committed a fraudulent and dishonest breach of trust;
(3) That the Bank participated in the giving of the guarantee; and
(4) That the Bank knew of or was wilfully blind to Rosenberg's fraud and dishonesty.
20 Laskin J.A. agreed with the trial judge that the plaintiff had proved the first and third elements of its case. However, with regard to whether or not Rosenberg had committed a fraudulent and dishonest breach of trust, the Court of Appeal disagreed with the holding of the trial judge. In reaching this conclusion, the Court of Appeal relied on the fact that Gold had eventually signed the directors’ resolution which authorized the guarantee. By signing the resolution, Gold effectively agreed to give the guarantee, thereby consenting to the breach of trust. This consent, if validly given, would negate any finding of a dishonest breach of trust. Laskin J.A. wrote (at p. 606):
If a beneficiary validly consents to a breach of trust before it is carried out, the beneficiary cannot claim compensation from the trustee for any subsequent loss. . . . This principle logically implies that a beneficiary’s consent will negate a finding of a dishonest breach of trust.
The Court of Appeal examined the facts surrounding the signing of the directors’ resolution and concluded that Gold understood the nature of the guarantee and was aware of the risk it posed to his share of the estate. Laskin J.A. said (at pp. 607-8):
[T]he record demonstrates that Gold knew what a guarantee was, he knew the reason for this guarantee and he knew the possible consequences of authorizing it. He was not misled about the purpose, the effect or the risk of giving his approval. Therefore Gold’s consent was valid.
Gold’s consent, since valid, precluded a finding that Rosenberg had committed a fraudulent and dishonest breach of trust. Therefore, the case did not fall within the scope of knowing assistance.
21 The above holding (i.e. that Rosenberg had not committed a fraudulent and dishonest breach of trust) was sufficient to dispose of Gold’s claim against the Bank. Nevertheless, Laskin J.A. proceeded to address the issue of whether or not the Bank had knowledge of the breach of trust.
22 In the opinion of the Court of Appeal, the trial judge had manifestly erred in concluding that the Bank had actual knowledge of the breach of trust. Specifically, Laskin J.A. held that the trial judge had failed to give sufficient weight to the Sills, Madorin opinion letter, which stated that the guarantee was valid. Laskin J.A. said (at p. 610):
[The opinion letter] undoubtedly provided comfort to the bank that the guarantee was not tainted by fraud. However, the trial judge did not refer to the opinion letter.
Given the content of the opinion letter, the Court of Appeal concluded that, contrary to the finding of the trial judge, the Bank neither knew of nor was wilfully blind to Rosenberg’s fraudulent and dishonest breach of trust. Laskin J.A. said (at p. 610):
Even if Rosenberg had misled Gold about the effect of the guarantee, the bank was not privy to their discussion and there is no other evidence that the bank knew Gold had been misled. Absent such knowledge the bank can divorce itself from Rosenberg’s dishonesty.
23 Accordingly, the Court of Appeal allowed the appeal and dismissed Gold’s claim against the Bank with costs.
3. Issues
24 (1) Is the respondent Bank liable under the doctrine of knowing assistance?
(2) Is the respondent Bank liable under the doctrine of knowing receipt?
4. Analysis
25 At the outset, I should note that I have read the reasons of my colleague La Forest J. in Citadel General Assurance Co. v. Lloyds Bank Canada, [1997] 3 S.C.R. 805, and I agree generally with his approach regarding liability for knowing receipt. Like him, I believe our reasons take a similar approach.
26 A person who has not been appointed as a trustee may, under certain circumstances, attract the liabilities of trusteeship. In Barnes v. Addy (1874), L.R. 9 Ch. App. 244, Lord Selborne L.C. explained that there are three situations in which a breach of trust may give rise to liability in a person who is a stranger to the trust. First, a person may be liable as a trustee de son tort. The facts of this case do not require consideration of this category of liability. Second, a person will be liable if he or she knowingly assisted in a fraudulent and dishonest breach of trust. This type of liability is referred to as “knowing assistance”. And third, depending upon considerations of notice, equity may impose liability if the defendant received, in his or her own right, property obtained through breach of trust. This last category of liability is referred to as “knowing receipt”.
27 This Court has expressed its approval of the Barnes v. Addy classification system, most recently in Air Canada, supra (at p. 810):
In addition to a trustee de son tort, there were traditionally therefore two ways in which a stranger to the trust could be held personally liable to the beneficiaries as a participant in a breach of trust: as one in receipt and chargeable with trust property and as one who knowingly assisted in a dishonest and fraudulent design on the part of the trustees. The former category of constructive trusteeship has been termed “knowing receipt” or “knowing receipt and dealing”, while the latter category has been termed “knowing assistance”.
28 Knowing assistance and knowing receipt share certain factual similarities; however, they are distinct heads of liability. Confusion has developed in the case law on account of a failure to distinguish between these separate forms of liability. The main source of confusion stems from disagreement over the degree of “knowledge” required for liability in each category. As Charles Harpum writes in his article “The Stranger as Constructive Trustee” (1986), 102 L.Q.R. 114, at p. 120, although a degree of knowledge is required for liability under both heads of liability:
[t]he cases reveal a sharp difference of opinion as to the degree of cognisance that is required before a person may be held liable as a constructive trustee and as to whether the degree of knowledge required under one head is necessarily applicable to another.
29 In the present case, the appellant argues that the respondent is liable under both knowing assistance and knowing receipt. I will consider each head of liability in turn. I will pay particular attention to the degree of knowledge required to justify liability in each category.
Is the respondent Bank liable under the doctrine of knowing assistance?
30 This Court reviewed the law of knowing assistance in Air Canada. In that case, we adopted the definition of “knowing assistance” given in Barnes v. Addy, where Lord Selborne L.C. stated that a stranger to the trust will be liable if he or she “assist[s] with knowledge in a dishonest and fraudulent design on the part of the trustees” (p. 252).
31 A “dishonest and fraudulent design” includes “the taking of a knowingly wrongful risk resulting in prejudice to the beneficiary”. As was said in Air Canada (at p. 826):
I would therefore “take as a relevant description of fraud ‘the taking of a risk to the prejudice of another’s rights, which risk is known to be one which there is no right to take’.”
32 As the name “knowing assistance” implies, the plaintiff must prove not only that the breach of trust was fraudulent and dishonest, but also that the defendant participated knowingly in that breach of trust. As stated in Air Canada (at p. 811):
The knowledge requirement for this type of liability is actual knowledge; recklessness or wilful blindness will also suffice.
33 As Millett J. explained in Agip (Africa) Ltd. v. Jackson, [1990] 1 Ch. 265, at p. 292, liability is imposed, in cases of knowing assistance, on the basis that the defendant has participated in a fraud and “participation”, in its relevant sense, implies actual knowledge of the fraud being perpetrated by the rogue trustee. La Forest J. reached a similar conclusion in Citadel where he described liability in knowing assistance as “fault-based” liability (at para. 46). Thus, the basis of liability, participation in a fraud, supports the test for liability which I set out in Air Canada, actual knowledge of the trust and its fraudulent breach.
34 In the present case, in order to recover damages for knowing assistance, the appellant must demonstrate the following:
(1) That there was a trust;
(2) That the named trustee, Rosenberg, perpetrated a dishonest and fraudulent breach of trust; and
(3) That the respondent Bank participated in and had actual knowledge of Rosenberg’s dishonest and fraudulent breach of trust.
35 I should note at the outset that both parties agree that there was, indeed, a trust.
36 Assuming without deciding that Rosenberg committed a dishonest and fraudulent breach of trust and assuming without deciding that the Bank participated in that breach of trust, in my opinion, the appellant’s claim in knowing assistance fails because of the failure to prove that the Bank had actual knowledge of Rosenberg’s fraud. As mentioned above, the Bank received an opinion letter from the law firm of Sills, Madorin. The closing paragraph of the letter stated:
The authorization, execution, issuance and delivery of the said Guarantee by the Corporation does not conflict with or contravene any terms, conditions or provisions of any law or agreement to which the Corporation is subject or to which the Corporation is a party.
37 In light of this letter, in my view, it cannot be said that the Bank had actual knowledge that the guarantee was obtained in breach of trust. As Laskin J.A. said (at p. 610), this letter “undoubtedly provided comfort to the bank that the guarantee was not tainted by fraud” and I agree with the Court of Appeal that the trial judge made a manifest error in holding to the contrary.
38 For this reason, in my opinion, the appellant’s claim in knowing assistance should be dismissed.
39 I will next consider whether the respondent is liable for the knowing receipt of trust property.
Is the respondent Bank liable under the doctrine of knowing receipt?
40 In a knowing receipt case, the plaintiff sues to recover his or her property which has come into the possession of the defendant, as a result of a breach of trust. As Lord Selborne L.C. said in Barnes v. Addy, the defendant has “receive[d] and become chargeable with some part of the trust property” (at pp. 251-52). However, the mere fact of receipt, of possession, is not a sufficient condition for liability. To be “chargeable” with trust property, a defendant must have received it in his or her own right, must have enjoyed the property beneficially. There is, thus, no cause of action in knowing receipt against a person who holds trust property merely as an agent for a third party. This was the rationale for dismissing the plaintiff's knowing receipt claim in Air Canada. As mentioned therein (at pp. 810-11):
The . . . category of “knowing receipt” of trust property is inapplicable to the present case because it requires the stranger to the trust to have received trust property in his or her personal capacity, rather than as an agent of the trustees.
See also Agip (Africa) Ltd., at p. 288.
41 The essence of a knowing receipt claim is that, by receiving the trust property, the defendant has been enriched. Because the property was subject to a trust in favour of the plaintiff, the defendant's enrichment was at the plaintiff's expense. The claim, accordingly, falls within the law of restitution. As Denning J. said in Nelson v. Larholt, [1948] 1 K.B. 339, at p. 343:
The right here is not peculiar to equity or contract or tort, but falls naturally within the important category of cases where the court orders restitution....
Similarly, in Royal Brunei Airlines Sdn. Bhd. v. Tan, [1995] 3 W.L.R. 64 (P.C.), at p. 70, Lord Nicholls of Birkenhead stated, “Recipient liability is restitution-based”. I note that La Forest J. reached a similar conclusion in Citadel, where he described liability in knowing receipt as “receipt-based” liability (at para. 46). Therein lies a fundamental difference between the categories of knowing assistance and knowing receipt. Participation in a fraud underlies liability in cases of knowing assistance; unjust enrichment is the essence of a claim in knowing receipt. In Agip (Africa) Ltd., Millett J. distinguished between the two heads of liability (at pp. 292-93):
Tracing claims and cases of “knowing receipt” are both concerned with rights of priority in relation to property taken by a legal owner for his own benefit; cases of “knowing assistance” are concerned with the furtherance of fraud.
42 As with knowing assistance, the plaintiff must prove a certain degree of knowledge on the part of the defendant to justify liability in knowing receipt. Unlike knowing assistance, where a clear test for the requisite level of knowledge has been set out by this Court in Air Canada, the case law does not clearly set out the degree of knowledge required to justify liability in cases of knowing receipt. Harpum, supra, states (at p. 267):
If a trustee transfers trust property [in breach of trust], the recipient must take that property subject to the trusts unless . . . the recipient is a bona fide purchaser without notice of that fact.
However, the exact meaning of “notice” has occasioned some disagreement in the jurisprudence.
43 Two main schools of thought emerge regarding the level of knowledge required to justify liability for knowing receipt. The first holds that a defendant will be liable under knowing receipt only if he or she received the property with actual knowledge (and this includes wilful blindness) of the breach of trust. For example, in Carl Zeiss Stiftung v. Herbert Smith & Co., [1969] 2 Ch. 276, Sachs L.J. said (at p. 298):
[The plaintiff must prove] both actual knowledge of the trust’s existence and actual knowledge that what is being done is improperly in breach of that trust. . . .
This view of the law appears to have found approval in In re Montagu's Settlement Trusts, [1987] 1 Ch. 264, where Megarry V.-C. held that actual knowledge, wilful blindness or recklessness were required for liability in knowing receipt cases.
44 An opposing school of thought holds that a court may impose liability for knowing receipt even if the defendant acted with something less than actual knowledge of the breach of trust. According to this approach, the defendant cannot retain the property in question if it was acquired in circumstances which would have alerted a reasonable person to the possibility of a breach of trust. In Nelson v. Larholt, Denning J. explained (at p. 343):
[I]f the circumstances were such as to put a reasonable man on inquiry, and he [i.e. the defendant] made none, or if he was put off by an answer that would not have satisfied a reasonable man, . . . then he is taken to have notice. . . .
To similar effect was the decision of this Court in Carl B. Potter Ltd. v. Mercantile Bank of Canada, [1980] 2 S.C.R. 343, where Ritchie J. quoted with approval from the decision of the Court of Appeal (at p. 347):
[The defendant] had sufficient notice of the unusual nature of the . . . funds to put [it] on its inquiry to determine the exact nature of these funds before dealing further with them.
And, in Cartwright v. Lyster, [1934] 2 D.L.R. 166 (Ont. C.A.), Middleton J.A., writing for the majority, held that the defendant was liable because it “had knowledge of the facts and circumstances that place them [sic] upon inquiry” (p. 169). Finally, in Canadian Pacific Air Lines Ltd. v. Canadian Imperial Bank of Commerce (1987), 27 E.T.R. 281 (Ont. H.C.), Maloney J. imposed liability on the grounds that the circumstances were such as to put the defendant “on alert”.
45 In my opinion, this latter approach is the preferable one as it best suits the restitutionary basis of a claim in knowing receipt. Harpum states (at p. 273):
Because the issue in cases of knowing receipt is essentially a proprietary one, a recipient of trust property may be liable as a constructive trustee if he failed to make the inquiries that he ought to have made, even though he acted in good faith. It is taken for granted in the cases that constructive notice of the impropriety of the transfer suffices for liability . . . .
46 A stranger in receipt of trust property is unjustly enriched at the expense of the trust beneficiary. Participation in a fraudulent breach is irrelevant to the plaintiff’s claim. Liability essentially turns on whether or not the defendant has taken property subject to an equity in favour of the plaintiff. The jurisprudence has long held that, in order to take subject to an equity, a person need not have actual knowledge of the equity; notice will suffice. In my view, the same standard applies to cases of knowing receipt.
47 In my view, the test as put forward in both Carl Zeiss Stiftung and Montagu’s Settlement is inappropriate to cases of knowing receipt. The basis of liability in both of these cases is a want of probity (see the judgment of Edmund Davies L.J. in Carl Zeiss Stiftung, at p. 301; see also Montagu’s Settlement, at p. 285). As such, these cases appear to conflate knowing receipt with knowing assistance.
48 The judgment of Sachs L.J. in Carl Zeiss Stiftung provides further evidence of this collapsing of the two distinct heads of liability where he describes the defendant in knowing receipt cases as a “party to a fraud” (at pp. 298-99). In my view, such a description is inaccurate. Unlike knowing assistance, knowing receipt does not require the plaintiff to show that the breach of trust was fraudulent. And unlike knowing assistance, the defendant in knowing receipt is in no way implicated in any wrongdoing perpetrated by the rogue trustee.
49 Rather, the cause of action in knowing receipt arises simply because the defendant has improperly received property which belongs to the plaintiff. The plaintiff's claim amounts to nothing more than, “You unjustly have my property. Give it back.” Unlike knowing assistance, there is no finding of fault, no legal wrong done by the defendant and no claim for damages. It is, at base, simply a question of who has a better claim to the disputed property.
50 In Air Canada, this Court appropriately applied the reasoning developed in Carl Zeiss Stiftung and Montagu’s Settlement in support of the actual knowledge requirement for liability in knowing assistance cases. I should add that, as discussed above, Carl Zeiss Stiftung and Montagu’s Settlement required actual knowledge on the part of the stranger to justify liability in circumstances of knowing receipt. In my view, actual knowledge is inappropriate as a test for liability in knowing receipt cases.
51 Given the differences between the two causes of action, I can see no good reason why the standard of knowledge which will give rise to liability ought necessarily to be the same. As Millett J. said in Agip (Africa) Ltd. (at p. 292):
The basis of liability in the two types of cases is quite different; there is no reason why the degree of knowledge required should be the same, and good reason why it should not.
52 Harpum discusses the policy considerations which support the application of a stricter standard on strangers in receipt of trust property than that applied to strangers who assist in a breach of trust (at pp.