In Green Light Solutions Corp. v. Baker (2021 BCCA 287), the British Columbia Court of Appeal examined when and how a lawyer’s trust obligation to a non-client may arise.
In Green Light, Mr. Baker’s client, Lynx, entered into a loan agreement with Green Light, which provided for a $30,000 USD deposit to be paid to Mr. Baker “in trust” and on certain conditions. Mr. Baker was not involved in the negotiation of the agreement – he did not know it existed until three months after it was executed. Rather, his client merely told him that funds were to be wired to his trust account and then provided him instructions to disperse the funds. Mr. Baker inquired whether there was a “hold back” on the funds, to which his client replied there was not. Mr. Baker then complied with his client’s instructions and dispersed the funds.
Three months later, when the conditions surrounding the loan failed to materialize, Green Light contacted Lynx for the return of the deposit. The parties agreed that Lynx had an obligation to return the deposit. However, a month later, when Lynx failed to return the deposit, Green Light contacted Mr. Baker demanding the return of the deposit. Shortly thereafter, for the first time, Mr. Baker was provided with a copy of the loan agreement. Green Light brought a claim against Mr. Baker and Lynx for breach of trust. Green Light obtained default judgment against Lynx and sought summary judgment against Mr. Baker. Green Light was successful before the Chambers Judge and Mr. Baker appealed.
In certain circumstances, an agreement between parties to pay funds “in trust” to one party’s lawyer may result in that lawyer becoming a trustee for a non-client, even when that non-client is adverse in interest to the lawyer’s client. Three avenues to liability as a potential trustee were open to the plaintiff in this case: implied acceptance to become a trustee; becoming a trustee de son tort; or “knowing assistance” of a fraudulent or dishonest breach of trust.
A trustee may accept their appointment by conduct, where they deal with trust property for reasons that cannot be clearly linked to another purpose; through exercising an act of ownership; or by actively interfering with the affairs of the trust (i.e. opening a bank account, signing cheques or instructing counsel).
Trustee de son Tort
Also known as a “de facto trustee”, a person who was not appointed as a trustee, but nevertheless administers the trust property will be treated as a trustee. The difference between a trustee de son tort and a trustee by implied acceptance is that the trustee de son tort can become liable as a trustee without being appointed. A trustee by implied acceptance becomes liable because they assumed the task for which they were appointed. The purpose of the trustee de son tort principle is to make a stranger to the trust liable for damages caused by administering the trust property.
A third party to a trust will become liable for knowing assistance where they assist with knowledge of a dishonest and fraudulent design on the part of the trustee. Liability pursuant to knowing assistance does not require the liable party to take control of the trust property or to administer it.
Duty to make Inquiries
If a lawyer has actual or constructive knowledge that they are holding property in trust for a non-client, but is unsure of the terms of the trust, the lawyer has an obligation to make inquiries to ascertain the terms. If a lawyer fails to make inquiries, the lawyer will be imputed with knowledge of that which they ought to know as an honest, reasonable person.
Because Mr. Baker had no knowledge that the trust existed, there was no obligation to make inquiries. There was no evidence that Mr. Baker explicitly or implicitly accepted the role of trustee to Green Light, and the act of depositing funds to his trust account was insufficient to impute him with knowledge that a trust existed. Moreover, there was no evidence that Mr. Baker assisted his client with a dishonest or fraudulent scheme.
At the summary judgment hearing, counsel for Green Light successfully argued that Mr. Baker’s professional standards as a lawyer obligated him to make inquiries with the sender of the funds regarding his ability to disperse them, notwithstanding that the sender was a non-client. At the Court of Appeal, Justice Abrioux made it clear that “inquiries required by professional standards cannot, on their own, serve to impute knowledge of the trust, since this would effectively result, for civil liability purposes, in the unilateral appointment of trustees.”
Accordingly, the British Columbia Court of Appeal unanimously allowed Mr. Baker’s appeal and dismissed Green Light’s action against him.
This entry was authored by Scott Lemke and Emma Chapple.