When asking a friend for a financial favour, people often fail to document their actions and decisions as thoroughly as they should – the trust people have in their friends frequently translates into a belief that they do not need to pay attention. Regardless of whether the trust was deserved, disputes may arise. In those circumstances, you can only hope that your spouse was paying attention while you were not.
The recent decision Pearson and Bhansingh v Corcoran dealt with one such soured friendship. Kim and John were long-time friends. After Kim was injured at work in the 1980s, he earned a limited income giving music lessons (Kim also received generous financial support from his family). Given his lack of steady employment, Kim did not qualify for a mortgage. John stepped in to help. Being recognized as credit worthy, John took title to Kim’s home along with the mortgage. Kim gave John post-dated cheques to make the mortgage payments and paid for all other household expenses directly.
This arrangement worked well for Kim, first with a house he bought in Mississauga, and later with a house he bought in Caledon. In both cases, John was placed on title to the homes and the mortgage although they were occupied and paid for by Kim. Kim moved into the Caledon house with his common-law partner, Renuka, in 1999, shortly before selling his Mississauga home.
In 2005, Kim sold his Caledon home. Kim told John that he did not need the money right away (as set out above, Kim received financial support from his family), so instead asked John to deposit the net sale proceeds into an interest bearing bank account (also held in John’s name). From time to time, John would make payments out of the account to Kim by cheque at Kim’s request.
At some point after 2005, Kim and Renuka started to worry about John, who they felt was acting “weird.” Litigation soon followed.
It was determined at an earlier stage in the proceedings that a trust existed between John and Kim. Among the remaining issues to be determined at the hearing of the application were:
(i) How much of the money paid out from the net sale proceeds by John was authorized by Kim and Renuka?
(ii) Should John be compensated for his role as trustee? If so, how much?
First, the court took note of what evidence it had before it, holding:
“Memories fade over time. Documents get lost or destroyed. Bank records become unavailable.
Those are all realities in this case. What the Court is left with is largely an assessment of credibility and reliability of the witnesses who testified at trial. That assessment will drive the answers to the questions identified above.”
The court then went on to find that neither Kim nor John were good witnesses; not necessarily because either was attempting to be deliberately coy, but because neither could remember much of what happened.
Luckily, Kim’s common-law spouse, Renuka, had been paying attention. Renuka was able to testify to most of the events in question. In addition, the court found that much of her evidence could be corroborated by documentary evidence. As a result, the court preferred Renuka’s testimony over the others.
On the evidence before it, the court found:
(i) John claimed to have made several cash withdrawals from the account which he paid to Kim, which Kim denied (he claimed all payments were made to him by cheque). The court held: “I doubt that either Kim or John would remember whether John made cash payments to Kim. [However, if] that had been done, Renuka would have known.” Having determined that the cash withdrawals were unauthorized payments out of the account, the court calculated how much was owing to Kim (net sale proceeds plus interest earned less authorized withdrawals).
(ii) John was seeking $30,000 in compensation. The court held that this amount was too high given John’s improper use of trust funds (he had made unauthorized cash withdrawals). However, the court held that Kim’s suggestion that no compensation was owed was not fair either – after all, Kim would not have been able to obtain the benefit of a mortgage and buy a home without John’s assistance. The court held that $5,000 was reasonable compensation, being the amount Kim testified he would have given John as a thank-you for his assistance.
The lesson to take away from this decision is the importance of good record keeping (a lesson trustees in particular should heed as they are under an obligation to account for their actions). As this case reminds us, the court will make a determination on the available evidence. Where documentary evidence is sparse, not everyone may be so lucky as to have a spouse who is able to fill in the gaps.