Clients Paying Third Parties Using Their Lawyer's Trust Account

Watson Goepel LLP's Litigation & Dispute Resolution Group was recently successful in clarifying how funds deposited in a lawyer's trust account on behalf of a third party are treated. In successive successful hearings, we argued that when a company pays funds into a trust on behalf of a beneficiary, it is the same as paying the beneficiary directly – even if the law firm holding the funds acts for the payee.

In 0972672 BC Ltd v Standard Group Projects Inc, 2022 BCSC 1995 and confirmed in Standard Group Projects Inc v 0972672 BC Ltd, 2023 BCCA 205, our client successfully argued that paying funds into a trust account in the name of a third party was sufficient to satisfy a contractual obligation to pay those funds, and make them "immediately available", to the third party.

This will allow greater certainty to parties who are required to make payments to bare trustees or companies facing contested control or ownership. Like most legal principles, however, the surrounding context is tightly connected with the principle's applicability.

Background

The claim involved a commercial dispute between two parties, 0972672 BC Ltd. ("Investor"), which our firm represented, and Standard Group Projects Inc. ("Standard"). Standard and Investor entered into an agreement (the "JVA") to, among other things, govern the ownership of a property registered in the name of 1064762 BC Ltd ("Owner"), and control over Owner itself.

Pursuant to the JVA, both Investor and Standard promised to provide shareholder loans to Owner and receive shares in it accordingly. The consequences of failing to pay the shareholder loan were significant: under the JVA, Investor could gain the right to acquire Standard's entire interest in Owner. In addition, the funds paid under the JVA had to be "immediately available" to the recipient – when the shareholder loan was paid, it had to be "immediately available" to Owner (as the recipient).

Both parties had until February 7, 2022 (the "Subscription Date") to provide their loans to Owner, but when the Subscription Date came, Standard failed to contribute their loan. Investor paid the loan amount to its own lawyers in trust, and the lawyers placed the funds into a trust account bearing the name of Owner. Investor subsequently took steps to acquire Standard's interest in Owner which Standard resisted. Investor quickly commenced a petition seeking declaratory approval of its actions.

Supreme Court/Court of Appeal

Standard took issue with the method in which Investor contributed its loan to Owner. It said that, among other things, (a) Investor did not make the funds "immediately available" as they were in a lawyer's trust account; (b) the funds were not sent to the Owner's bank account and, (c) by paying the funds to its own lawyer's trust account, there was a conflict of interest between Investor and Owner.

Those arguments were all rejected by the Court. Justice Brongers found a number of reasons why it was reasonable for Investor to act as it did:

a. Owner had received funds through a lawyer's trust account in the past without objection;

b. Investor's lawyer was the registered and records office of Owner;

c. two out of the three directors of Owner had agreed that it was acceptable for Owner to receive the loan through the lawyer's trust account

d. the sole director and officer of Investor and one of the directors of Owner, had not been previously provided with any other banking information for Owner; and

e. Standard's nominee for director to Owner was facing an extradition order.

With respect to arguments that the funds were not "immediately available", the Court found there was no evidence that Investor's use of its lawyer's trust account to transfer the loan funds impeded Owner's access to the funds in any way. Applying a "practical common sense approach", Justice Brongers found that the funds were "immediately available" once the funds were paid into the trust account. He also found that, notwithstanding Investor's lawyers held the payment for Owner in trust, there was no conflict of interest in using the Investor's lawyer's trust account since it was "simply being used to facilitate the movement of funds".

These decisions were upheld on appeal. The Court of Appeal agreed that the loaned funds were "immediately available" because Owner's directors could have acted with them at any time after the funds were deposited. Further, payment of funds into trust in the name of a designated beneficiary was found to be a "commonly used mechanism" in real estate and other commercial transactions. It is the "effective equivalent" to making a payment directly to the beneficiary. The Court of Appeal agreed that trusts should be treated the same way in this instance as well.

Legal Importance

The impact of this decision clarifies what many lawyers have taken for granted: if funds are paid into a lawyer's trust account for the benefit of a third party it will usually be treated as the "effective equivalent" to a payment made directly to the third party beneficiary. This provides some measure of certainty, especially when dealing with certain companies, like Owner, where control over a company is contested or where the company's banking information is unknown.

Paying funds into trust for a beneficiary does not automatically equate to a payment to a beneficiary and lawyers must be cautious not to slip into this assumption. To that end, there are some important lessons that can be taken from Standard to manage uncertainty and risk when considering or accepting funds into trust for a third party.

  1. Read or Word the Contract Accordingly

For the parties to Standard, a specific contractual term specifying how Owner would be paid could have clarified and manifestly changed the facts. For example, had the JVA specified how Owner was to be paid, Standard may have had no grounds on which to dispute the legitimacy of Investor's payment – presuming Investor complied with those terms.

Similarly, lawyers should be conscious of how they describe funds being paid or received. The JVA required funds to be "immediately available" to the party receiving them, which required some contractual interpretation. Now that the Court of Appeal has provided some clarity on that term, it might be used with more certainty. Once a party has the power to effect control over the funds, by, for example, passing a corporate motion to use the funds, they become "immediately available" to that party. Of course, in the event Investor employed a different method of trust transfer which did not require the trustee to pay out the funds as soon as practicable, the court may not have found that this method made the funds "immediately available" to Owner.

  1. Pay the Funds into Trust Accordingly

One helpful piece of evidence that assisted Investor was that the funds were paid into its lawyer's trust account in the name of Owner. That is, the funds were not placed into a trust account associated with Investor's file, rather, they were isolated from Investor and paid into trust in the name of Owner. That distinction provided some assurance that it was not Investor that could simply decide what to do with the funds – a point Standard attempted to make at the petition hearing – rather Owner was responsible for determining what happened to the funds in trust.

This is important to bear in mind for lawyers accepting transfers in trust for beneficiaries. Investor's solicitor could not, for example, have immediately returned the trust transfer to Investor once Investor deposited it. That would have breached trust conditions. By keeping watertight compartments for beneficiaries, the Court in Standard was assured the funds were paid in for the benefit, and exclusive use, of Owner.

  1. Follow the Proper Corporate Guidelines

Relatedly, parties should ensure they follow the proper corporate guidelines once funds are deposited in trust. Once the loaned funds were paid into trust, Owner did not act until its directors convened a directors meeting. Investors' directors ensured they were acting through Owner when they made their decisions, which was vital to ensure their actions could be upheld as valid when they commenced litigation. Had Owner's directors (or Investor's lawyer) acted on the funds without following such protocols, it may have been a valid basis on which to undermine the foundation of their actions.

Conclusion

Standard provides some measure of guidance to legal practitioners on the circumstances under which it will be acceptable to accept a client's funds as payment for another party using their trust account. Directors, officers and lawyers may seize the principles of Standard for greater comfort paying (or accepting) funds into trust if there is no clear means to pay a contested company or a bare trustee – for example, if no other governing document or contract applies, no bank account exists and the beneficiary is not independently represented by counsel. Those transfers may be "immediately available" to the recipient and acceptance of those funds will not necessarily constitute a conflict of interest on the part of counsel, even though the funds are paid by its own client to another party.

Notwithstanding the unique factors of this case, Investor v Standard is one of few cases which speaks to the issue of using a lawyer's trust account to facilitate the transfer funds, particularly when there is the transferor and transferee are tightly connected.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.