\u00a0\u00a0\u00a0\u00a0\u00a0 Locking v. McCowan<\/em> (Locking<\/em>) stems from a motion to strike a proposed class action brought by unitholders against the trustees of a real estate investment trust (REIT), a form of unincorporated business entity.[1]<\/a> The decision interprets the REIT\u2019s organizational document, known as a \u201cdeclaration of trust\u201d (DOT), in addressing two main issues: the scope of trustees\u2019 duties and unitholder remedies. Locking <\/em>raises novel questions regarding the governance of income trusts. What does it mean for trustees to owe duties to a non-legal entity? Should remedies available to shareholders of a corporation be available to unitholders of income trusts?<\/p>\n During the relevant time period, the REIT in question\u2014the TSX-listed Partners REIT\u2014was governed by a board comprised of three trustees.[2]<\/a> The REIT purchased three properties at the behest of its interim CEO, who failed to disclose to the trustees or unitholders that he had both a business and personal relationship with the vendor of the properties. As soon as his conflict came to light, the transaction was set aside and Partners REIT\u2019s unit price declined by more than thirty per cent. The representative plaintiff, a unitholder of the REIT, sued for the loss suffered from the decline in unit price because of this improper transaction. The plaintiff claimed, inter alia<\/em>, that the interim CEO and the trustees had breached their fiduciary duty to unitholders and that the trustees were in breach of trust.<\/p>\n Justice Belobaba of the Ontario Superior Court of Justice considered whether these claims constituted viable causes of action that could form the basis of a class proceeding on the motion to strike at issue.[3]<\/a> Central to the decision was his interpretation of section 10.5 of the DOT. This provision required the trustees to \u201cact honestly and in good faith with a view to the best interests of the Trust and … to exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.\u201d[4]<\/a> The provision further provided that the duties and standard of care of the trustees \u201care intended to be similar to, and not to be any greater than, those imposed on a director of a corporation governed by the Business Corporations Act<\/em> (Ontario).\u201d[5]<\/a><\/p>\n Justice Belobaba held that the breach of fiduciary duty claim had no chance of success and should therefore be struck down.[6]<\/a> First, he considered the fiduciary duty of the CEO, an officer but not a trustee. Justice Belobaba reasoned that the fiduciary duties of officers are similar to those of corporate officers, and relied on the decisions of the Supreme Court of Canada in BCE Inc. v. 1976 Debentureholders<\/em> (BCE<\/em>)[7]<\/a> and Peoples Department Stores Inc. (Trustee of) v. Wise<\/em> (Peoples<\/em>)[8]<\/a> to conclude that these duties are not owed to any individual unitholder. He wrote:<\/p>\n It is well established in the corporate context that an officer\u2019s duties are owed \u201cto the corporation,\u00a0and only<\/em>\u00a0to the corporation\u201d.\u00a0In the context of a publicly traded income trust such as the REIT, an officer\u2019s duties are owed to the REIT itself (technically, to the trustees in their capacity as trustees of the REIT). If Mr. McCowan owed duties exclusively to the REIT and no direct duties to the unit-holders, it follows that he owed no fiduciary duties to the unit-holders.[9]<\/a><\/p>\n Since the CEO did not owe a fiduciary duty to unitholders, their suit against him for breaching this duty could not proceed.[10]<\/a><\/p>\n Second, Justice Belobaba considered the duties of the trustees. The DOT provided that the duties of the trustees are to be \u201csimilar to, and not\u00a0… greater than\u201d those imposed on corporate directors.[11]<\/a> In Justice Belobaba\u2019s estimation, to hold that the trustees owed fiduciary duties to the unitholders would be to impose duties that are greater than those imposed on directors of corporations.[12]<\/a> He concluded:<\/p>\n The plaintiff\u2019s allegations that trustees Weinberg, Feldman and Charlebois owe a fiduciary duty to the unit-holders would impose a legal obligation that would be \u201cgreater than\u201d the duties imposed on a director of an Ontario corporation and thus contrary to section\u00a010.5 of the DOT. This is reason enough for my conclusion that it is plain and obvious that the unit-holders\u2019 breach of fiduciary duty claim against the three trustees is not a reasonable cause of action and is doomed to fail.[13]<\/a><\/p>\n Finally, Justice Belobaba found that the essential elements of a fiduciary duty to unitholders, including language in the DOT that would obligate the trustees to act in the best interests of unitholders as well as those of the REIT, were absent.[14]<\/a> In addition, trustees could not owe duties to both the trust and its unitholders because this would present the possibility of conflicting fiduciary duties.[15]<\/a><\/p>\n Despite striking down the claim of fiduciary breach, Justice Belobaba allowed the breach of trust claim to proceed. The plaintiff asserted this claim in two parts, arguing that one of the trustees failed to act honestly, in good faith and in the best interests of the REIT, while the remaining two trustees did not act with the degree of care, diligence and skill of a reasonably prudent person in comparable circumstances. The trustees argued that a plain reading of the DOT\u2014which provides that unitholders enjoy only those rights \u201cexpressly conferred\u201d therein and any duties owed by the trustees are not to the unitholders but to the trust[16]<\/a>\u2014implies that the unitholders do not have standing to bring an action for damages. Yet, Justice Belobaba pointed to other provisions of the DOT, including one indicating that the relationship of the unitholders to the trustees is \u201csolely that of beneficiaries to the Trust.\u201d[17]<\/a> In other words, simply because the provisions relating to the fiduciary duty and the duty of care do not indicate that duties are specifically owed to unitholders does not mean that the unitholders have no rights under the DOT\u2014they have rights as beneficiaries of the trust.<\/p>\n Finally, on the issue of remedies, the trustees argued that the unitholders were legally blocked from suing the trustees because of the rule in Foss v. Harbottle<\/em>,[18]<\/a> which holds that individual shareholders have no cause of action for wrongs committed against the corporation. Any suit for such losses must be brought by the corporation itself (via management) or by way of a derivative action.[19]<\/a> In holding that this issue should not be determined on a motion to strike,[20]<\/a> Justice Belobaba appeared to agree with the plaintiff\u2019s argument that the losses stemming from the improper transaction were sustained by individual unitholders rather than the trust as a whole.[21]<\/a> He further noted that whether the rule in Foss v. Harbottle<\/em> applied to REITs (a relatively new form of business organization) raised novel and complex questions that were not fully settled at law.[22]<\/a><\/p>\n Underlying the judgment is conceptual uncertainty regarding the extent to which corporate law applies in the income trust context. Corporations are separate legal persons under corporate law, while, at common law, trusts are not.[23]<\/a> Income trusts are \u201cflow-through entities\u201d; meaning that they are set up to flow out distributable cash in order to minimize tax burdens and to maximize investor returns. There are other important differences: trusts are governed by a DOT, a governance document that is specific to the trust. The terms of the DOT can (and do) vary across trusts.[24]<\/a> In contrast, all corporations are subject to certain mandatory governance provisions under corporate statutes. In some parts of the judgment, Justice Belobaba seems to appreciate the absence of a separate legal entity and the difference in governance between trusts and corporations,[25]<\/a> while in others, the legal ramifications of the distinction between the two are blurred (or lost).[26]<\/a><\/p>\n In this comment, we begin with the basic observation that an income trust lacks a separate legal personality and is fundamentally a different business organization from a corporation. To apply corporate law to the interpretation of trustees\u2019 duties fails to acknowledge the absence of a distinct legal entity in the trust context, and the historically fundamental fiduciary relationship between trustees and beneficiaries (i.e., unitholders, in this context). As one of the leading texts on trust law states, \u201cThe hallmark of a trust is the fiduciary relationship which the trust creates between the trustee and the beneficiary.\u201d[27]<\/a> While Justice Belobaba maintained the distinction between trusts and corporations in considering the claim for breach of trust, his analysis of the claim for breach of fiduciary duty muddies the waters at times, perhaps because of the explicit wording of the DOT. The issue may, therefore, boil down to the drafting of DOTs themselves and the importance of maintaining clarity in the duties of trustees qua trustees.<\/p>\n Part\u00a0I sets out background relating to the governance of income trusts, including empirical data regarding the framing of trustees\u2019 duties in DOTs. Part\u00a0II examines the DOT in Locking<\/em> and analyzes the court\u2019s holding with regard to the breach of fiduciary duty, breach of trust and unitholder remedies. Part\u00a0III explores policy directions for the developing law in this area.<\/p>\n Central to trust law is the fundamental point that three parties are necessary for the creation of a trust: the settlor, the trustee or trustees and the beneficiary or beneficiaries.[28]<\/a> In the income trust context, the only beneficiaries are the unitholders,[29]<\/a> and trustees must make decisions and act solely in the best interests of the unitholders. The original income trusts were designed to flow out all or substantially all of their distributable cash in order to maximize investor yields while minimizing, or even eliminating, entity-level income tax.[30]<\/a> When the number of publicly-traded income trusts began to proliferate in the mid-1990s,[31]<\/a> carrying with it the perceived potential of personal liability for public investors,[32]<\/a> many provinces enacted statutes to guarantee limited liability to unitholders in public income trusts.[33]<\/a> Apart from statutory requirements relating to trusts, trustees are free to determine the governance structure of the trust, which they do in the privately-drafted DOT. The DOT establishes the trust, describes the relationship between the trustees and the unitholders, and governs the structure and activities of the trust. The notion that parties can contract out of default trust law obligations (including their fiduciary duties) has taken hold in common law jurisdictions, including Canada (though \u201ccontracting out\u201d was not at issue in Locking<\/em>). Statutory laws that govern corporations, such as the Canada Business Corporations Act<\/em>[34]<\/a> (CBCA<\/em>), or its counterparts in provincial jurisdictions, do not apply.[35]<\/a><\/p>\n Prior to examining the Locking<\/em> decision itself, it is useful to gain context for our discussion by considering the extent to which DOTs generally tend to rely on or mimic corporate law, and the areas in which they do so. In an empirical study based on data relating to income trusts in 2005, we examined the DOTs of 187\u00a0income trusts listed on the Toronto Stock Exchange.[36]<\/a> We found that DOTs mimic corporate statutes in some areas, such as notice provisions for meetings. In other areas, such as remedial provisions, DOTs depart significantly from the corporate statute. In other words, it is not a forgone conclusion that DOTs will in all cases mimic the corporate statute and, indeed, our research shows that often they do not. To understand the governance of a trust, reference to its DOT is essential, and indeed governance structures will be particular to each trust; certainly, no default terms contained in corporate statutes are applicable.[37]<\/a> We also found that governance terms turn in significant part on the nature of the income trust\u2019s industry.[38]<\/a> We repeated this study as of 31\u00a0December\u00a02014, with income trusts that remained publicly-listed on the TSX (totaling sixty-three in number) and found continued similarities (and many of the same differences) as between trusts\u2019 DOTs and the corporate statute.[39]<\/a><\/p>\n In both the 2005 and 2014 data sets, the duties of trustees comprise one area in which the terms of DOTs vary when compared not only to corporate statutes, but also across DOTs. Some DOTs mimic corporate statutes, providing that trustees owe their duties \u201cto the trust\u201d while others provide that trustees owe their duty to both the trust and unitholders, what we refer to here as a \u201cdual duty\u201d.[40]<\/a> Only one trust in the 2014 data set provided that trustees owe their duties to the unitholders alone. The following chart, which reflects both datasets, sets forth the breakdown of those to whom trustees owe duties.[41]<\/a><\/p>\nI.\u00a0 Income Trust Governance in Context<\/h1>\n