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TRUSTS - Trust property - Tracing

Friday, April 07, 2017 @ 8:52 AM  


Lexis Advance® Quicklaw®
Appeal by the plaintiff investor from a decision respecting the distribution of funds to investors in a Ponzi scheme. The investors provided their investments to Base Finance on the understanding that Base Finance was the conduit through which the investments would flow through to the mortgagors. Base Finance did not obtain any mortgages using the investors’ money. In September 2015, the company’s bank account with about $1.085M on deposit was frozen and a receiver appointed over the assets of Base Finance. The chambers judge impressed the frozen funds with a constructive trust. He found that the investors’ monies as they related to the September bank statement could be easily and clearly traced to the bank account. He then directed a pro rata sharing based on tracing or the lowest intermediate balance rule (LIBR) such that a claimant could not claim an amount in excess of the lowest balance in a fund subsequent to their investment but before the next claimant made its investment. The appellant argued the chambers judge erred in law by holding that a pro rata sharing on the basis of tracing to the lowest intermediate balance in the account was the “general rule” unless it was practically impossible, and that the chambers judge failed to consider the intention of the beneficiaries to hold commingled funds as co-owners in the mortgage investment.

HELD: Appeal dismissed. The chambers justice applied the LIBR which was the fairest rule unless it was unworkable or the contrary intention of the beneficiaries was shown. The unworkable exception did not apply because the order demonstrated that the lowest intermediate balance rule was, in fact, workable. Nothing in the evidence suggested that the investors intended there be any particular distribution method, therefore the LIBR applied. There was nothing to suggest that the investors considered the question of how a shortfall in the commingled funds would be distributed among the investors.

Easy Loan Corp. v. Base Mortgage & Investments Ltd., [2017] A.J. No. 132, Alberta Court of Appeal, R.L. Berger, P.A. Rowbotham and J.D.B. McDonald JJ.A., February 13, 2017. Digest No. TLD-Apr32017012