Demand Promissory Notes and the Estate - Hull on Estates Podcast #68
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Craig and Bianca discuss demand promissory notes and the recent decision of Hare v. Hare [2007] 83. O.R. (3d) 766. The Hare decision specifically deals with the limitation periods applicable to the enforcement of a demand promissory note.
Craig and Bianca also discuss demand promissory notes in the estate context, and the considerations parents should take into account when making demand loans to children.
Click "Continue Reading" for the transcribed version of this podcast.Demand Promissory Notes and the Estate - Hull on Estates Podcast #68
Posted on July 17th, 2007 by Hull & Hull LLP
Bianca Le Neve: Hello and welcome to Hull on Estates. You’re listening to Episode #68 of our podcast on Tuesday, July 17th, 2007.
Welcome to Hull on Estates, a series of podcasts for the Canadian legal community dealing with issues and insights surrounding estate planning in Canada. Hosted by the lawyers of Hull & Hull, the podcast will touch on some key considerations when planning estates and Wills. Now, here are today’s hosts.
Bianca La Neve: Hi Craig.
Craig Vander Zee: How are you today, Bianca?
Bianca La Neve: Great, how are you?
Craig Vander Zee: Good, but I’m a little bit sad because I understand today is the last podcast that you and I will be doing as a partnership…
Bianca La Neve: That’s right.
Craig Vander Zee: …for some time now. And so I just wanted to say at the beginning of the podcast that I’ve really enjoyed doing these podcasts with you.
Bianca La Neve: Thank you, likewise. So today Craig, we’re going to speak about Demand Promissory Notes.
Craig Vander Zee: Well, we’re going to speak about them in the context of the estate as well. And first of all, when you’re dealing with demand loans, it’s probably not a bad idea to touch on some other concepts first. And really what I mean by that is, when an adult child receives money from a parent during a parent’s lifetime, it’s key to find out the intentions of both the parent and the child and clearly define them. And by way of example, a child may consider a payment from a parent as a gift without conditions attached to it. The parent, on the other hand, may not quite, probably not surprisingly and may consider it either to be a gift, a loan to be repaid, or an advance on an inheritance to be taken into account in the division of the parents’ estate. So that by canvassing the intentions of the parties up front, and most specifically, the parent, misunderstandings can be avoided.
But today’s topic, you’re quite right, we’re going to focus in on Demand Promissory Notes. So the assumption is today that the parent intends that the loan, that is the advance, be a loan and that the loan is evidenced by way of a Demand Promissory Note. And this is actually a common way of evidencing, or it has been in the past, a loan from a parent to a child.
What is perhaps the most significant thing about Demand Promissory Notes, though, Bianca is that the ability to enforce them does not last forever. And quite often, a parent might believe that upon making a Demand Promissory Note, if interest payments have been started but perhaps stopped, or if they’re not enforcing for a couple of years, that they have the ability to do so pretty much whenever they want. And that’s just simply wrong. Historically, what that meant Bianca, a Demand Loan has been held to mature as soon as it is delivered. And in the old regime, that is, the limitations, the old Limitations Act, the one applicable prior to 2004, if an action was not commenced in respect of a Demand Loan within six years, it was barred. Under the new Act, however, which came into effect January 1, 2004, the limitation period was reduced to two years. The key thing, and I know that I’m, I guess, I’m hogging the mike on this one, the key thing with this is that, given the language in the new Act, it was arguable to interpretation as to whether the law had actually changed with respect to the limitation periods of Promissory Notes, such that it was the refusal to repay the Demand Loan that triggered the limitation period, and not simply the non-payment of it. And that was an important distinction which was dealt with by Ontario’s Court of Appeal in December 2006 in the Hare and Hare decision. And I think that our listeners are probably tired of my voice, so perhaps you could explain what the background was or the facts were in that case.
Bianca La Neve: Well Craig in the case, the Mom, Mary Hare or the plaintiff, had loaned her son Brian, the defendant, a sum of money in 1997. And what they did to evidence that loan was they executed a Promissory Note dated February 10, 1997 in which the son Brian promised to pay his Mom on demand the sum of $150,000.00 dollars. And the Note indicated that the loan was payable on demand with interest, calculated at the rate of prime plus one percent per year. Now the son Brian last made an interest payment on this Note on October 26, 1998. So no payment in respect of the Note, either in principal or interest, was made since October, 1998. The Mom subsequently became incapable and her Power of Attorney made a demand for payment on behalf of the Mom in 2004. Brian, the son, did not make any payment. Accordingly, in February of 2005, the Mom’s Power of Attorney commenced an action for repayment of all monies due on the Note.
Craig Vander Zee: It’s a pretty technical set of facts when we’re dealing with all the dates. But the long and the short of it is, is that the last payment on the Demand Promissory Note was back in October of 1998. And the question was, the fact that the Statement of Claim was issued more than six years past that date. Was that enough to have it statute barred? And what was interesting, one of the interesting aspects of this case is that it was decided by way of a summary judgment. And the defendant, that’s the son, moved under Rule 20 of the Rules of Civil Procedure, for summary judgment. And the summary judgment was on the limitation issue itself. Bianca, what’s an interesting aside is that a number of weeks ago, I did a short blog on the Hare and Hare case. And on the same day that the blog was displayed, the lawyer for the defendant in this case actually blogged me, or wrote to me, and indicated to me that one of the facts that’s not known in this case by simply reading it is that one of the son’s positions was that he had repaid most of the loan, or all of the loan, but that moving on summary judgment on that point would have difficult or problematic because of a genuine issue to be proved.
So that’s an interesting aside. In the end, the lower court judge, the motion court judge granted the summary judgment, indicating that while the plaintiff’s argument, the mother’s argument, was attractive, it simply didn’t hold water when matched up against the legal interpretation of the Limitations Act. And as such, in the end, the judge decided that it is not the Demand for Payment on a Demand Promissory Note that’s key, it is the date that it is delivered or the date of the last interest payment, if an interest payment has been made.
Bianca La Neve: And obviously, Craig, this is in the context of Demand Promissory Notes. So you have to always bear in mind the distinction between a Demand Promissory Note and a Promissory Note in which you actually state a date of repayment which may be a month, two months, two years down the line.
Craig Vander Zee: That’s right Bianca, because in those types of situations, it may be actually very clear as to when the date of the final payment is due. And then presumably, that would be the triggering point for the limitation period. But you always have to be careful with all forms of Promissory Notes, and carefully read the Promissory Note and carefully deal with the Promissory Note when you’re dealing with a client.
Bianca La Neve: So Craig, according to the motions judge, when was the demand for payment, or when did the limitation period start running on this Demand Promissory Note?
Craig Vander Zee: It started running in October of 1998, the date of the last payment. And as such, I guess simply put, the mother was out of luck or her Power of Attorney was out of luck because of the interpretation. We’re not going to get into, Bianca, the actual decision itself, other than what the ultimate conclusion was and we’ve just commented on that. But what I would point out is that it was a split decision at the Court of Appeal level in Ontario. And the majority and the minority views were quite different. But rather than getting into the actual interpretations along the lines of the Limitations Act and how they intertwine, I think it’s probably more important that we discuss what kind of considerations you might have in dealing with a Demand Promissory Note.
Bianca La Neve: Craig, before we move on to the considerations in the context of estates, I wanted to just point out for our listeners that the Court of Appeal made no order as to costs. So this actually…usually in a summary judgment motion, there’s this assumption, I believe, that if you win your summary judgment motion, you’re going to get costs. But in this case, the Court of Appeal indicated that because the case raised these novel points of interpretation, on which there was no existing case law to sort of guide the parties and because the issues were significant and arose early in the context of this new 2004 Limitations Act, there would be no costs awarded.
Craig Vander Zee: Bianca, while the Hare and Hare case dealt with a Power of Attorney acting for the mother, in dealing with this issue in the estate context and considering the limitation period which under the new Limitations Act, that is, a Demand Loan that would perhaps be issued today by a parent to an adult child, the applicable limitation period would be two years from the date of delivery or the date of the last interest payment on the Demand Promissory Note.
So what’s key is for estate trustee’s to really turn their minds early in their administration of the estate to whether there’s a Demand Promissory Note and what the appropriate limitation would be. Because simply put, should either the parent or the adult child die, and that is the adult child who received the payment, before the repayment of the loan, it will be, in fact, the estate trustees of their respective estates that will become responsible for dealing with this problem. So if the parent dies, his or her estate will be the creditor in respect of the loan and the Demand Loan will actually be payable to the estate, unless the loan is forgiven in the parent’s Will or is dealt with by way of a hodgepodge clause or some other agreement. Looking at it from the adult child’s estate, should the adult child pass away first, the estate will become the debtor in respect to the loan and the loan will be payable by the child’s estate to the parent, unless the loan is forgiven by the surviving parent. So you really do have to be careful, given this new limitation period applicable to this and the Court of Appeal’s interpretation as to when Demand loans…the limitation period can be triggered on it, because it is a quick limitation period.
Bianca La Neve: As a result, during the parent’s lifetime, the parent should take into account certain considerations when they’re making a Demand Loan to an adult child. And some of these considerations would include ensuring that at least interest payments are being made on the Demand Loan, so that you don’t…you continually re-trigger the beginning of a limitation period. Diarizing the date of any expiry of the limitation period, in the case where no interest payments have been made. Or perhaps even having a new Demand Promissory Note executed before the expiry of the limitation period.
Craig Vander Zee: As well, Bianca, you can consider entering into an agreement or an acknowledgement that the debt is outstanding prior to the limitation period. But you have to be careful because this could be interpreted as simply a forbearance agreement. And there are cases out there dealing with forbearance agreements and it’s possible that that may not be enough to save the limitation period. So you really do have to be careful. You could try to secure the Promissory Note with collateral. You could make demand for repayment on the loan early, within the two year period or early on after the last interest payment. Perhaps not really intending to fully enforce but doing that so as to protect yourself. And then if you’re ever in doubt, then at the end of the day, you should commence an action, either by way of Statement of Claim or by Notice of Action. And the Notice of Action will allow you thirty more days to file the Statement of Claim with the Court and then five months after that to serve the Statement of Claim.
So, and perhaps lastly is to consider the loan as part of the parent’s estate plan. And specifically, the parent might consider including a hodgepodge clause in the Will so that whether the loan is considered a loan or whether it’s just considered an advance, it’s taken into consideration in the Will. But the topic of hodgepodge clauses and how they may be constructed in the Will is a topic for a different day. And I’ll certainly miss not being able to discuss that one with you. But I think that’s probably a good place to end it today.
Bianca La Neve: Thanks Craig.
This has been Hull on Estates with the lawyers of Hull & Hull. The podcast you have been listening to has been provided as an information service. It is a summary of current legal issues in estates and estate planning. It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.
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