A trust account can sometimes be the shelter for a property looking for an owner.
During a conflict, while waiting for a settlement, it is often offered to deposit sums in trust with a notary or lawyer. To whom does this money belong?
For example, a tenant sublets premises. The subtenant agrees to pay rent directly to the landlord. A dispute arises between the parties. A few months later, the subtenant requests arbitration, as allowed by the contract. The subtenant stops paying rent and the tenant is therefore obliged to pay it. In the meantime, the arbitrator chosen by both parties orders that the rent payments by the subtenant be deposited in trust with the lawyers. The said lawyers undertake to keep these sums until the arbitration award is rendered.
A year goes by and the subtenant assigns his assets. The bankruptcy trustee includes the trust funds in the bankrupt's assets, while the tenant claims ownership and the subtenant's bank also claims these funds as a first mortgage creditor.
The court* states that the question is not whether the funds paid entered the landlord's assets "but rather whether the subtenant really divested himself of these funds definitively before his bankruptcy". The judge concludes that "the considerations that lead a party to deposit a sum of money with a third party can vary greatly depending on the circumstances. The definitive or contingent nature of the deposit must therefore be determined on a case-by-case basis." The subtenant's payment of rent allowed him to continue his activities in the interest of all his creditors. Bankruptcy or not, the subtenant had no right to oversee or control the funds deposited in trust. The court rules that these funds are not part of the subtenant's bankruptcy estate.
A trust account can sometimes be the refuge of property in search of an owner.
*CA Montreal 500-09-016983-066.
