In Polish National Union of Canada v. Branch 1 of the Polish National Union of Canada (released May 2014), Justice Penny of the Ontario Superior Court of Justice found that a local branch of a federal not-for-profit corporation was not a separate legal entity and did not own property separate and apart from the corporation of which it was a part.
Polish National Union of Canada (the "Union") was incorporated under Part II of the Canada Corporations Act in 1973. Members of the Union were divided among the several local branches of the Union. Each local branch was not separately incorporated but, nevertheless, was administered by its own board whose election, terms of office and powers are set out in the constitution of the Union. Each branch must have at least 10 members and must be approved by the board of directors of the Union.
The main issue in the case was who beneficially owned certain property in Toronto acquired in 1997: the Union or the local branch?
Mr. Justice Penny ruled in favour of the Union, holding that branches are not legal entities but rather internal divisions of the Union. Branches are not organized by separate written agreement among branch members and have no constating documents, objects or by-laws of their own. Rather, the branch is governed by the constating documents of the Union.
What was particularly germane was the language of the Union's constitution, which was accepted as governing both the Union and the branch. Under the constitution, branches cannot own property. Rather, the Union owns all property, including property ostensibly of the branches. Furthermore, the letters patent of the Union provide that in no circumstances do members of the Union become entitled to any property of the Union on dissolution. Rather, the letter provide that the net assets are to be distributed to the Canadian Polish Congress or one or more recognized Polish Canadian charitable organizations in Canada.
Even though the Union purported to purchase the property in trust for the branch and signed a contemporaneous trust agreement to the same effect, the court found that these instruments were ineffective and invalid, as being inconsistent with the Union's constitution.
3. Key Observations
Justice Penny's decision in Polish National Union is to be contrasted with the decision of Justice Myers of the same court in Polish Alliance, the reasons for judgment for which were released the day before release of the reasons for judgment in Polish National Union. Both cases involved competing claims to beneficial ownership of real property by a local branch or by the incorporated parent organization. Both organizations were long-standing pillars of the Polish Canadian community. To learn more about Polish Alliance read our blog piece here.
In Polish Alliance, Justice Myers found that valuable real property was beneficially owned by the members from time to time of the local branch. The local branch was found to be internally treated as having an identity that was independent of that of the parent corporation and, crucially, that the funds for the purchase and upkeep of the real property were contributed by members of the branch. Title to the property was in the name of a separate corporation but was subject to a resulting trust in favour of the members from time to time of the local branch. In Polish Alliance, the branch pre-dated the corporation, and the incorporation was not known to the general members of the branch. To learn more about Polish Alliance read our blog piece here.
None of these factors appear to have been present in Polish National Union. While the purchase documents and trust agreement may have supported a finding that the corporation had acquired the property in trust for the local branch, the source document establishing the Union and the branch was the Union's constitution, which provided that the Union owned all of the property of the branches and the branches cannot own property. Thus, the inherent contradictions in the documents were decided on the basis of a hierarchy or ranking. The constitution ranked first. Purchase documents and a trust agreement that were inconsistent with the constitution were invalid to the extent of the inconsistency.
Together, these twinned cases shed some light on when and to what extent an unincorporated branch of a not-for-profit corporation will be internally treated as a chapter devoid of any independent identity from the parent corporation or as an association having some measure of independent identity from the corporation (although falling short of a separate legal personality for external purposes). The cases are highly fact-specific. However, they will serve as guide-posts for other cases in which there are rival claims to valuable property.