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Law of successions: the trustee, also a beneficiary of the trust, cannot act alone in order to bind the trust

Law of successions; a trust established by will. In a recent decision, the Superior Court confirmed that ss. 1275 of the new Civil Code of Québec provides that a trustee, who is concurrently beneficiary of the trust, must act jointly with a trustee who is neither settlor nor beneficiary of that same trust. The Superior Court’s decision, written by the honorable judge Jacques Babin, further emphasizes the importance of this disposition and presents it as a rule of public order that may result in the absolute nullity of any contract that violates its content. (Financière Transcapitale inc. v. Fiducie succession Jean-Marc Allaire, 2012 QCCS 5733).


THE FACTS


In 1987, the late Jean-Marc Allaire signs a will by which a trust is created in benefit of his spouse, Louise Allaire, and of their two children, Diane and Marc Allaire. As is stated in the will, all three are also designated liquidators and trustees of the succession. Jean-Marc Allaire passes away in December 1994. Following a period of financial difficulties, Marc Allaire, the son of the deceased, contacts the plaintiff, Financière Transcapitale inc., in hopes of obtaining a short term loan. A loan for the amount of $300 000 is granted to Marc Allaire, who agrees to offer the portfolio of the estate, having a value of $500 000 and held by Desjardins, as security. In result, a resolution is signed by the three trustees, formalizing the putting up of the trust’s portfolio as security and authorizing Marc Allaire to sign all relevant documents for and in the name of the trust. Finally, a control agreement is signed by the trust and Desjardins by which the latter agrees to conserve the portfolio for the duration of the security and to follow the plaintiff’s instructions in the case where, following Marc Allaire’s failure to reimburse the loan, the property offered as security must be liquidated.


However, one year after it is issued and is deemed repayable, the loan remains unpaid, forcing the plaintiff to contact Desjardins and to ask that it proceed with the liquidation of the trust’s portfolio. Receiving absolutely no response from Desjardins, the plaintiff files a motion for forced surrender and for the sale of certain assets belonging to the trust.


THE SUPERIOR COURT’S DECISION


The defendants invoke the nullity of the security offered by arguing that the trust did not have the legal capacity to sign the resolution that had permitted the putting up of the trust’s portfolio as security and the conclusion of the control agreement with Desjardins. In support of this argument, the defendants make reference to ss. 1275 of the Civil Code of Québec, a rule of public order stating that a beneficiary of a given trust must necessarily act jointly with a trustee who is neither settlor nor beneficiary of that same trust.  However, seeing as this disposition had only come into effect in 1994 as part of the new Civil Code of Québec, no person, holding neither the position of settlor nor of beneficiary, had ever been designated by the will signed in 1987. The plaintiff presents ss. 1275 of the Civil Code of Québec as not being a rule of public order and of instead, permitting the explicit or implicit ratification of all acts concluded in violation of this article by the defendants. Through their actions, the plaintiff argues that the defendants ratified all acts in question.


The Superior Court states that it is unlikely that the jurists involved in the current situation (the notary who prepared the loan as well as the lawyers who drafted the control agreement) failed to make mention of the possible issues that may be raised by ss. 1275 of the Civil Code of Québec. The Superior Court references several court decisions and works of doctrine in order to show that since the coming into effect of the new Civil Code of Québec, even the trusts created by will prior to 1994 are subject to the necessary designation of a trustee who holds neither the position of settlor nor of beneficiary. The judge also confirms that ss.1275 of the Civil Code of Québec is a rule of public order and that all acts concluded in violation of its content by a trustee who does not have the capacity to act alone are absolutely null. Consequently, the acts in question cannot be ratified. In this particular case, the Superior Court recognizes that Jean-Marc Allaire’s will needed to be modified in 1994 in accordance with ss.1275 of the new Civil Code of Québec, as to take into account the modifications that were made to the law and in order to designate a trustee, who having the simultaneous position of neither settlor nor of beneficiary, could legally approve the putting up of the trust’s portfolio as security. Unfortunately for the plaintiff, Financière Transcapitale inc., the failure to respect article 1275 is fatal and results in the invalidity of the security.

THE CONCLUSION


The Superior Court therefore rejects Financière Transcapitale inc.’s motion and recognizes that it is probable that Marc Allaire remains unable to repay the loan granted to him. Without further elaborating on the particular issue, the Superior Court makes mention of the plaintiff’s right to file a claim against the jurists involved in the circumstances, as they failed to inform the trustees of the impact that the new law may have on the trust. Dubé Légal inc., Montréal succession law lawyers.