Fiduciary Relationships

 

FiduciariesMost of us likely do not give a moment’s notice to the concept of the fiduciary relationships. This concept, however, is an extremely important principle of the common law. It provides a very flexible legal remedy often used used to protect vulnerable individuals who have been wronged by another who holds a position of power over them.

Understanding fiduciary relationships and fiduciary duties is especially important to legal professionals as we are all in fiduciary relationships with our clients.

The focus of this paper will be to explain and give some examples of how fiduciary relationships have been imposed and interpreted by our courts.

Background

As you may know, our common law legal system originally developed from judicial precedents established by English courts beginning almost 1000 years ago. Over the centuries our courts have developed legally recognized rights and duties that arise when persons are in certain relationships with others. For example, the case law developed the principle that a parent has a duty to provide necessaries to his or her child.

A fiduciary duty is the most onerous duty imposed by the common law. It is imposed by the courts whenever they find that a fiduciary relationship exists. The concept originally developed in Roman law and was borrowed by the Courts of Equity who developed the branch of the common law known as equity. These principles of equity are now part of our common law and are used by our modern day courts generally to avoid injustices being perpetrated.

Fiduciary duties originally developed as part of the law of trusts. Thus, fiduciary duties would arise whenever parties made a trust agreement. Under the terms of a trust, the trustee became the legal owner of the property yet owned and managed that property for the benefit of the beneficiary. In such a case, the trustee was said to be in fiduciary relationship with the beneficiary.

Equitable notions of justice demanded that trustees who had undertaken responsibility for the property or affairs of another, should not be permitted to exploit their position for their own benefit at the expense of the beneficiary.

Our courts have expanded this very useful concept of a fiduciary relationship well beyond the law of trusts. Thus, in general terms, modern courts will likely find that a fiduciary relationship exists whenever a relationship of trust or confidence exists between two parties. For example, because clients rely upon the integrity of their lawyer the courts will deem this legal professional to be in a fiduciary relationship with his or her client.

Whenever a fiduciary relationship exists the court will impose fiduciary duties upon the fiduciary who is in a position of trust towards another person.

The essence of a fiduciary relationship is that the fiduciary is in a position of confidence and power over another person and thus must exercise their power or discretion in the other’s best interest.

Simply put where a fiduciary relationship exists, the fiduciary must not make a personal profit from his or her position and must not allow personal interest to conflict with his fiduciary duties. The fiduciary owes a duty of loyalty, a duty to act in good faith and a duty to avoid any conflict of interest or self-interest.

Every fiduciary is required to subordinate his or her own interests to the promotion of the interests of the beneficiary. The law dictates that the fiduciary cannot utilize his or her position of power to their own advantage or to the other’s detriment. Thus, the fiduciary must act solely and selflessly in the interests of the beneficiary.

How do we recognize a fiduciary relationship?

In the decision of Frame v Smith ( 1987) 2 S.C.R. 99 the court set out the following guidelines to help recognize fiduciary relationships, stating as follows :

“Relationships in which a fiduciary obligation has been imposed seem to possess three general characteristics:
(1) The fiduciary has scope for the exercise of some discretion or power.
(2) The fiduciary can unilaterally exercise that power or discretion so as to affect the beneficiary’s legal or practical interests.
(3) The beneficiary is peculiarly vulnerable to or at the mercy of the fiduciary holding the discretion or power. ”

Fiduciary relationships are of many different types and can range from giving money to the errand boy who is bound to bring back the change to the most intimate and confidential of trust. For example all professionals handling the affairs of others are typically in a fiduciary relationship with their clients. This would include partners, agents, directors and legal professionals as previously mentionned.

There is no closed category of cases where the courts will find a fiduciary relationship to exist. Indeed they have recognized fiduciary obligations in a wide variety of situations. Here are some examples

Guerin v. The Queen [1984] 2 S.C.R. 335 involved a lawsuit brought by the Musqueam against the federal government who made an agreement to lease their lands in 1958. These lands were 162 acres of superb green space, much of it waterfront, near UBC. The government rented these lands for 75 years to Shaughnessy Golf & Country Club in a sweetheart deal with a rent of merely $29,000. More troublesome yet was the lack of rent escalation for 15 years. Even then the escalation was capped at a maximum of 15 per cent per annum.

The Supreme Court of Canada found that this was an exploitative bargain which was “unconscionable” and a breach of the Crown’s fiduciary duty to the Musqueam nation whose affairs the Crown was managing. The court thus awarded damages of $ 10 million to the Musqueam.

More recently, in Norberg v Wynrib ( 1992) 92 DLR (4th) 449, at 499. McLachlin J. declared that “fiduciary relationships are capable of protecting not only narrow legal and economic interests, but can also serve to defend fundamental human and personal interests”.

In this case Ms. Norberg was a young woman addicted to painkiller medication. She was obtaining these drugs from an elderly doctor, who suggested that he would supply drugs in return for her giving him sexual favours . This casual arrangement of “sex for drugs” continued for some time. When Ms. Norberg asked Dr. Wynrib for help getting off drugs, he advised her simply “to quit”. He continued supplying drugs to Ms. Norberg until she decided, on her own, to go to a rehabilitation centre to get help with her drug addiction.

When the case reached the Supreme Court of Canada, two of the justices found that a fiduciary relationship existed. They found the doctor to be a fiduciary because he was in a relationship of trust and confidence who had the power to exercise a discretion over his patient. This discretion made her particularly vulnerable to any abuse by him and they ruled that the doctor had breached his fiduciary duties to his patient and awarded damages on that basis.

This case is also a good illustration of the courts’ ability to shape the common law to make it more socially responsive and acceptable to the community.

Similarly other decisions have recognized a fiduciary relationship between parent and child and school boards and students.

Another good example of the scope of fiduciary duties is the recent case of Olive Hospitality Inc. v. Woo 2006 BCSC 1554, appeal decision at 2007 BCSC 355. The facts and trial decision are summarized in the opening paragraphs of the appeal decision :

“Olive Hospitality Inc. was engaged in the development of a specialty restaurant franchise in this province, financed by Asian investors seeking entrepreneurial opportunities to facilitate their immigration to Canada. With an investment of $2,178,500 and financing from HSBC Bank Canada, the company had, through its subsidiaries, opened three restaurants and was about to open a fourth as part of a business plan for the eventual operation of 30 restaurants. Tae Soo Woo was a director of the company. He resigned in acrimonious circumstances. He sent a notice of his resignation to the bank and in so doing maliciously defamed the company in statements he made relating to its financial stability. The fourth restaurant was never opened and the investment was then lost when the company sold its assets for $10 and the assumption of some debt.

On the trial of this action, commenced by the company and its subsidiaries against its former director, Madam Justice Ross awarded general and punitive damages of $60,000 for defamation (plus $6,323.39 in respect of funds improperly taken from the company) and $1,088,995 in damages for breach of fiduciary duty based on the value of a lost opportunity to realize a future financial advantage: 23 B.L.R. (4th) 78, 2006 BCSC 1554.”

In this case, the BCCA overturned the trial decision essentially on the basis that the resultant loss to the company had not been properly established. At trial the loss that was proven was actually the loss to the other individual shareholders rather than to the company who was the plaintiff.

The list continues to expand. As this article goes to press, Madame Justice Wedge has very recently reserved in the case of Canucks dispute involving Francesco Aquilini’s purchase of the team. According to press reports Tom Gaglardi and Ryan Beedie have brought that action alleging that Aquilini was their partner and thus owed them the duties of a fiduciary. They allege that he breached those duties by secretly negotiating to purchase the Canucks while they were still attempting to do so.

Powers of Attorney

A common fiduciary relationship is that of a person holding a power of attorney for another. Many B.C. decisions have made it clear that a holder of a power of attorney owes a fiduciary duty to the donor.

For example Kask Estate v. Welsh 2000 BCSC 791 which involved a daughter who held a POA for her elderly father. She succeeding in depleting his estate in the years before his death after he became mentally incompetent. By the time of his death, little was left in the estate. In finding the daughter liable for breach of fiduciary duty, Lysyk J. said as follows :

[24] In that Ms. Welsh held her father’s power of attorney, she owed to him a fiduciary duty: ” It was her duty not to prefer her interest or that of her family over his in the handling of his money which he had entrusted to her. I do not consider that Ms. Welsh determined she would deplete all of what would be her father’s estate once she held his power of attorney and had the opportunity to spend his money. Rather, it seems more probable that she simply found his money to be a ready resource and, instead of preserving it as apart from the costs of maintaining him she was duty bound to do, she spent it. ”

A similar case, Egli (Committee of) v. Egli 2004 BCSC 529, involved a son who had transferred his father’s home and investment accounts to him and his wife under a power of attorney that the father had given him some years before. By the time of the father’s death, the estate had been completely depleted by these inter vivos transfers.

The trial judge ultimately decided that the transfer of the family home was valid however the transfer of an investment account was in breach of the son’s fiduciary duty. The son was thus ordered to compensate his father’s estate for the amounts transferred.

Garson J. stated at paragraph 82:

“It is the attorney’s duty to use the power only for the benefit of the donor and not for the attorney’s own profit, benefit or advantage (Chapman) The attorney can only use the power for his or her own benefit when it is done with the full knowledge and consent of the donor. I am not aware of any authority that detracts from this principle in circumstances where the benefit is conferred on family members”.

In this case, the judge found the transfer of the house was done with full knowledge and consent however the transfer of the investment account was not.

The principle enunicated in the above case may be somewhat problematic in that, almost invariably, where the holder of the power of attorney executes some transaction which personally benefits the holder, he or she will insist that all was done with the full approval and knowledge of the elderly, frail donor.

In Fraser v Fraser 2000 BCSC 0211, four brothers were assisting their 90 year old mother to manage her financial affairs. One of them, unbeknowst to his three brothers, obtained a power of attorney from their mother without her first obtaining independent legal advice. A few days later he convinced her to take $ 40,000 from her GIC and invest it in Eron Acceptance. This represented 70% of her estate and was clearly a risky investment in which he lost all of her money. Although he did not use the POA to effect the transaction, the judge found that he had obtained the POA specifically for that purpose and would have used it, if necessary.

In finding the defendant liable for the loss, Dillon J. observed as follows :

[26] The defendant breached his fiduciary duty to the plaintiff in conducting himself in this manner when he knew that the plaintiff relied upon him. This fiduciary duty arises in all of the circumstances here, but also arose from the power of attorney whether or not it was actually used in the transaction “… He failed to exercise reasonable care in numerous respects, including: failing to read or understand the investment documents, failing to adequately protect the bulk of the plaintiff’s assets, failing to diversify the investment, failing to obtain independent advice, unreasonably relying on oral representations made at large meetings, investing at high risk in all of the circumstances, failing to obtain the consent and advice of his brothers, and failing to inform the plaintiff or his brothers either before or after the investment. ”

Remedies for Breach of Fiduciary Duties

Whenever a court finds a breach of fiduciary duty, then the fiduciary will be liable to place the beneficiary in that same position as the claimant would have been, had no breach been committed. Equity adopts the position that, where a breach occurs, any gain resulting belongs to the beneficiary whereas any loss is the trustee’s personal loss and full restitution must be made.

A breach of a fiduciary relationship can give rise to a wide range of remedies. Generally speaking, in addition to awarding compensation (damages are the common law remedy, compensation is the equitable remedy) our courts can impose restitutionary remedies such as the constructive trust, rescission, injunctive relief , equitable compensation and tracing and lastly an accounting for profits. Thus a claim of breach of fiduciary duty may open many doors not otherwise available at common law.

Conclusion

Whenever there is an inherent trust relationship between the parties with a corresponding potential for exploitation or damage, our courts are increasingly willing to recognize the existence of a fiduciary relationship and award a remedy for breach of fiduciary duties.

The concept of fiduciary relationships with corresponding fiduciary duties is one of the most sensible and flexible responses of the common law to the modern requirements of justice in individual cases.

Removal of an Executor – Trustee

 

Removing executorDunsdon v Dunsdon 2012 BCSC 1274 has an excellent and brief summary of the law relating to the removal of an executor-trustee, pre WESA as of April 1, 2014 :

[202] Put broadly, a trustee may be removed where his or her acts or omissions endanger the trust property or demonstrate a want of honesty, of reasonable fidelity, or of the proper capacity to execute the duties of office: Conroy v. Stokes [1952] 4 D.L.R. 124 (B.C.C.A.). The existence of friction between the trustee and one or more beneficiaries is usually not sufficient, of itself, to justify removal of the trustee: Erlichman v. Erlichman, 2000 BCSC 173; Re Blitz Estate, 2000 BCSC 1596. However, where there is dissension among the trustees themselves by which the trust administration grinds to a standstill or otherwise hampers the proper administration, the courts tend to remove one or more of them. In those instances, misconduct per se is not an essential prerequisite: Re Consiglio Trusts (No. 1) (1973), 36 D.L.R. (3d) 658 (Ont. C.A.); Wilson v. Heathcote, 2009 BCSC 554.

[203] In all cases, the fundamental guide must be the welfare of the beneficiaries: Letterstedt v. Broers (1884), 9 App. Cas. 371 (South Africa P.C.).

Criteria For Removal of a Trustee

criteria to removeCriteria For Removal of a Trustee:

Grafton v Canada Trust 2012 ONSC 6955 is an interesting case on when a court will or will not remove a trustee.

In this case a 92 year old life tenant in a house of disrepair wanted to borrow $200,000 in a reverse mortgage at % 8 for the purpose of renovating the house she lived in. The capital account to maintain the house had expired in 1999.

The corporate trustee refused to authorize the reverse mortgage and the life tenant sought a court order to remove the trustee.

The court refused to remove the trustee, finding that it was acting in the best interests of both the life tenant as well as the residual beneficiaries. Any monies used to upgrade what was essentially a tear down house would not benefit the residual beneficiaries at all.

The court relied upon Radford v Radford 2008 43 ETR ( 3d) 74 and the five criteria it set out when determining whether to order the removal of a trustee or not:

1. Choice of estate trustee not to be lightly interfered with;

2. Clear necessity for removal must be established;

3. Removal must be the only course to follow;

4. Removal to be guided by the welfare of beneficiaries;

5. Non-removal must likely prevent proper execution of trust

The life tenant bears the onus of satisfying the Court that the removal of Canada Trust is logical and the only course for me to follow.

Clear necessity for removal of Canada Trust has not been established

Given that the court is not to lightly infer with the discretion exercised by the testator (in choosing that act as executors and trustees), as the Weil case, [1961] O.R. 888 at 889 (Ont. C.A.) interference must not only be well justified, but must amount to a case of clear necessity. I cannot see that a basis for justification of the removal has been adequately established; the evidence presented me falls far short of clear necessity. The only justification I see is that Canada Trust disagrees with Ms. Ross’s suggested approach.

Removal must be the only course to follow

The evidence presented me falls far short of proving that there is no other course to take but the removal of Canada Trust as a trustee/executor. Canada Trust proposes selling the property; something the will empowers the trustees and executors to do. The will gives them the “the right to list and sell the property where “it is advisable in the light of future events or circumstances not at this time determinable”.”

[25] It seems apparent that the testator had hoped that the capital account would be sufficient to pay for maintenance of the property over the life tenancies of her daughters, but it fell short. This is the unforeseen circumstance that brings us to the current situation of indebtedness and absence of an ongoing income stream to support the property.

[26] The most problematic factor for me however is that:

Removal must be guided by the welfare of the beneficiaries

Paragraph 103 of Justice Quinn’s Radford v. Wilkins decision cites Crawford v. Jardine, [1997] O.J. No. 5041 (Ont. Ct. (Gen. Div.)) which states that: “In deciding whether to remove an estate trustee, “the court’s main guide should be the welfare of the beneficiaries”.”

[27] While Ms. Ross argues that a reverse mortgage would provide funds to complete the required capital repairs to the foundation for instance, (thereby increasing the value of the property) I am uncertain if that will in fact increase the property value. If a purchaser were only interested in this lakefront property; intending to tear down the cottage for instance, it may well be that the money would have been unnecessarily spent.

Prior Unregistered Trust Takes Priority Over Creditor

Unregistered Trust Agreement and Creditors

Colantonio v Don Park and Mercedes Benz 2013 ONSC involves a dispute between an estate and a creditor with respect to an unregistered trust agreement, and the priority between the two competing claims.

A mother and father purchased a house in 1965, and when the father died in 2003 the mother became the sole owner. The mother shortly thereafter executed a transfer of title in the house to her two sons. Each son was to have an undivided 50% interest in the house while their mother reserved a life interest to herself.

Their mother also signed a declaration of trust which establish that her sons were her bare trustees but she retained the right to have the sons transferred title back to her.

This trust agreement was not registered on title to the house.

In 2006 one son applied to lease an expensive car and claim that he lived at the house and owned the house free and clear. That son subsequently died and the following year the estate agreed to reconvey title to the house back to the mother, so that she could sell the house to fund her assisted living.

At that time it was discovered that the car dealership had executions against the deceased son, which prevented the transfer of clear title being conveyed back to the mother.

The mother brought application, supported by the two estates, for a declaration that she was the legal and beneficial owner of the house.

The court agreed with the mother and found that the evidence of the car lease had little bearing on the determination of the parties interests.

The information in the application did not reflect the sons intentions nor those of her mother as settler of the trust.

The fact that the mother did not provide a motive in creating the trust was not fatal to finding that the trust existed.

The mother made sworn statements that she did not intend that her sons become beneficial owners of the house. When the mother made the sons bare trustees in 2003, she was not yet prepared to give away her house.

In fact the mother intentionally preserve beneficial interest in the house about the sons could not lose it.

The mother intended to convey the house to her sons in trust to herself. The fact that one son mispresented his interest in the house could not undermine his mother’s intention to the property. That sons information was false.

In Young v. LeMon (1985), 3 C.P.C. (2d) 163 (Ont. Dist. Ct), the Ontario District Court held that an un­registered trust agreement takes priority over an execution creditor where the trust instrument was created prior in time to the creditor’s Writ of Fi Fa. This court has recently reiterated the point in Michaud v. Coreslab Struc­tures (Ont.) Inc., 2012 ONSC 355 (Ont. S.C.J.), at para 59, where it stated (quoting Anger and Honsberger, Law of Real Property):

An execution creditor can sell the lands of his debtor under execution but the land to be sold is subject to the charges, liens and equities to which it was subject in the hands of the debtor. Hence, it has been repeatedly held that if there is an unregistered interest outstanding against the lands at the time that execution is lodged with the sheriff, the unregistered interest is entitled to priority over the execution. In other words the execu­tion creditor stands in no better position than his debtor.

It is long established that, “[i]n order to create a trust, there must exist what is commonly referred to as a certainty of intention.” Erb v. R. [1999 CarswellNat 2435 (T.C.C. [General Procedure]), 1999 CanLii 203, at para 27. As explained in Eileen E. Gillese, The Lawof Trusts (1997), at p. 39:

To satisfy the certainty of intention requirement, the court must find an intention that the trustee is placed under an imperative obligation to hold property on trust for the benefit of another. Certainty of intention is a question of construction; the intention is inferred from the nature and manner of the disposition considered as a whole. The language employed must convey more than a moral obligation or a mere wish as to what is to be done with certain property. The language used need not be technical, so long as the intention to create a trust can be found or inferred with certainty.

Duties of a Trustee

Duties of a Trustee

Zimmerman v. McMichael Estate 2010 ONSC 2947, 57 E.T.R. (3d) 101,103 O.R. (3d) 25 is an excellent review of the strict duties that govern the conduct of a trustee.

Deceased were husband and wife and founders of extensive Canadian art collection (Collection) donated to province of Ontario in 1966. The Trustee was an attorney and friend to deceased .
In 2001 deceased executed mirror wills that appointed the other as sole executor and niece and her husband as alternates .
Their Wills left estate to their spouse but if no surviving spouse, residue of estate was to go to Collection after five bequests of $50,000 .
The Husband died November 2003 and wife signed power of attorney appointing trustee as her sole attorney.
In January and February 2004 lawyer prepared trust deed contemplating trustee would settle trust of wife’s property . The Niece then raised questions about trustee’s ability to settle trust in his capacity as attorney and wife executed deed creating trust and authorized all property be transferred to trust except for $250,000 which was held back to satisfy bequests in will.
The Trust deed contained terms that differed from will, including provision that on wife’s death property was to be retained for 21 years rather than immediately being distributed to Collection
The Wife died July 2007 and the niece and her husband were granted certificate of appointment of estate trustee with will.

The Niece and her husband successfully brought application for declaration that power of attorney and trust were void and order that required the trustee to account.

The Law

An attorney is a fiduciary whose powers and duties must be exercised and performed diligently, with honesty and integrity and in good faith,
for the incapable person’s benefit:
An attorney who receives compensation for managing property must exercise the degree of care, diligence and skill that a person in the business of managing the property of others is required to exercise:

30 A trustee of a trust owes the same duties of loyalty, prudence and good faith that an attorney
for property does pursuant to the S.D.A.: Banton v. Banton. [1998J O.J. No. 3528, 164 D.L.R.
(4th) 176 (Ont. Gen. Div.), at paras. 151 and 152. As a fiduciary, a trustee has three principal
duties:

(a) to carry out the terms of the trust with honesty and due care and attention;
(b) to personally carry out the responsibilities entrusted to him or her and not to delegate those responsibilities; and
(c) to ensure that his own interests do not conflict in any way with his duty to the beneficiaries that he serves.
See: Jenkins & Scott, Compensation & Duties of Estate Trustees, Guardians & Attorneys (Aurora, ON: Canada Law Book, 2006) at p. 12:20, citing the Ontario Law Reform Commission Report on the Law of Trusts – Volume 1 (Toronto: Ministry of the Attorney General, 1984) at p. 23; Donovan W.M. Waters, Waters’ Law of Trusts in Canada, 3d. ed. (Toronto: Thomson Carswell,2005)atp. 877.

(b) The duty to account

31 A trustee has an obligation to keep proper accounts. A trustee must keep a complete record of his/her activities and be in a position at all times to prove that he/she administered the trust prudently and honestly. He/she must have the accounts ready and give full information whenever required: Carmen S. Theriault, Widdifield on Executors and Trustees, 6th ed.(Scarborough, ON: Thomson Carswell, 2002) at p. 13-1; Waters’ Law of Trusts in Canada, above, at p. 1063; Sandford v. Porter, [1889] O.J. No. 43,16 O.A.R. 565 (Ont. C.A.).
32 An attorney for property has the same obligations. An attorney must, in accordance with the regulations established pursuant to the S.D.A., keep accounts of all transactions involving the grantor’s property: s. 32(6). Sub-section 2(1) of Ontario Regulation 100/96 relating to the S.D.A. provides that the accounts maintained by an attorney shall include, among other things:

(a) a list of the incapable person’s assets as of the date of the first transaction by the attorney or guardian on the incapable person’s behalf…;
(b) an on-going list of assets acquired and disposed of on behalf of the incapable person, including the date of and reason for the acquisition or disposition and from or to whom the asset is acquired or disposed;
(c) an on-going list of all money received on behalf of the incapable person, including the amount, date, from whom it was received, the reason for the payment and the particulars of the accounts into which it was deposited;
(d) an on-going list of all money paid out on behalf of the incapable person, including the

amount, date purpose of the payment and to whom it was paid; [and]
(h) an on-going list of all compensation taken by the attorney or guardian, if any, including the amount, date and method of calculation.
33 Sub-section 6(1) of that regulation provides that an attorney shall retain the accounts and records required by the regulation until he/she ceases to have authority and the attorney is discharged by the Court on a passing of accounts under s. 42 of the S.D.A.

34 A trustee must make a proper accounting as a condition precedent to being awarded compensation. Without a proper accounting, the court is unable to assess the conduct of the fiduciary and to determine the compensation to which he or she is entitled. Where a trustee is found to have failed to keep proper accounts and to have been grossly indifferent to his/her fiduciary obligations, he/she may be disentitled to compensation: Widdifield on Executors and Trustees, above, at page 13-7; Gibson, Re, [1930] M.J. No. 34, [1931] 1 D.L.R. 159 (Man. C.A.); Picov Estate, Re, [2000] O.J. No. 682 (Ont. S.C.J.).

35 In Assaf Estate (Re) (2009), 94 O.R. (3d) 561, [2009] O.J. No. 1086 (Ont. S.C.J.), I referred to the following statement in Rodney Hull, Maurice Cullity & Ian Hull, Macdonell, Sheard and Hull on Probate Practice, 4th ed. (Toronto: Carswell, 1996) the authors state at 358-359:
The conduct of an executor or trustee in carrying out his or her duties may be such as to justify the Court in depriving him or her or the right to remuneration; and an executor must make a proper accounting as a condition precedent to being awarded compensatioa But only exceptional misconduct should deprive him or her of the right to remuneration … In general, although an executor may be guilty of neglect and defaults, these, if not dishonest, and capable of being made good in money, do not deprive the executor of the right to compensation although they may influence the amount allowed, [emphasis added]
See also: Sievewright v. Leys (1882), 1 O.R. 375, [1882] OJ. No. 137 (Ont. H.C.); McClenaghan v. Perkins (1902), 5 O.L.R. 129, [1902] O.J. No. 24 (Ont. C.A.); Picov Estate (Re.), above.

36 An attorney who fails to retain receipts supporting substantial cash withdrawals or expenses charged against the incapable person’s property has not adequately carried out his/her duties and will be held personally liable for the unsubstantiated withdrawals: Lanthier v. Dufresne Estate, [2002] OJ. No. 3397, [2002] O.T.C. 671 (Ont. S.C.J.) at paras. 52-57; Ronson Estate, Re, [2000] OJ. No. 1294 (Ont. S.C.J.) at paras. 15-20.

c) Misuse of trust funds

44 It is a basic principle of trust law that a trustee is not entitled to use the trust property for his or her own personal benefit. If a trustee cannot account for or explain disbursements or expenses charged against a trust he/she is personally liable to the trust for those disbursements and expenses. This is known as a “surcharge”: See, for example, Jacobs v. Hershorn, [2006] O.J. No. 1333, [2006] O.T.C. 331 (Ont. S.C.J.) at paras. 18-21.
45 Falsification of accounts occurs when there is a disbursement shown on the accounts which the objectors allege is wholly false or in some part erroneous: Picov Estate, Re, above, at para. 25; MacDonnell, Sheard, Hull, Probate Practice, (4th ed.) at p. 350.

The Authority of the Executor

Romans Estate v. Tassone 2009 BCSC 194 is a very good case authority of the executor that reviews the legal authority of an executor appointed under a valid will.

The matter related to the estate of an elderly man who was stricken late in life and
conveyed assets to a friend and named his new apparently much younger female caregiver his sole beneficiary.

The Court found:

The Executor’s Authority

[29] Probate in common form is the procedure by which a will is approved by the Court as the last will of a testator. Probate in solemn form pronounces for the validity of the will. It also confirms the appointment of the person named as executor in the will. The Court issues an order, called the “letters probate”, as proof of his or her authority to deal with the estate.

[30] Executors, however, take their authority not from the letters probate, but from the will itself, and, thus, they may act for the estate from the death of the testator.

[31] Of course, it may be necessary for an executor to act on behalf of the estate pre-emptively, for example, to preserve assets or to make claims and satisfy limitation periods. That said, the author of Feeney’s Canadian Law of Wills, 4th ed. (Toronto: Butterworths, 2000) at s. 7.33, page 7.13 notes that “[a]s a practical matter, however, there is little executors may do, other than pay debts, until letters are issued to them because the letters, for most purposes, are the only recognizable evidence of their authority”.

ER 991 (Ch. D.), Goulding J. referenced earlier jurisprudence noting that an executor’s authority was based on the will, not on obtaining probate, but obtaining probate was necessary to perfect the action and obtain judgement. Goulding J. held that the court should not, even where the defendant is prepared to admit the executor’s title, waive the production of letters probate:

40] The authorities in my view make several matters clear: (1) an action can be commenced without obtaining probate, as an executor’s authority is based on the will, (2) before proceeding with an action already commenced, the parties to an action may require that the Plaintiff prove their authority by producing letters probate, (3) the court may require that a Plaintiff prove their authority, by producing letters probate, of its own motion, when appropriate and (4) the court may order a stay of proceedings any time after the commencement of an action where it is in the interests of justice to do so, pending the issuance of letters probate.

The law seems to be clear that an executor can bring an action in his or her capacity as executor before probate is granted but cannot obtain judgment in the action without probate having been granted: see Chetdyv. Chetdy, [1916] 1 A.C. 603 (P.C.), cited by Allen J. in Harshenin v. Bayoff, [1991] B.C.J. No. 3161 (S.C.).

How Much Should An Executor Be Paid

How Much Should An Executor Be Paid?

Hooke Estate v. Johnson 86 E.T.R. (3d) 92

 

The deceased appointed her solicitor as trustee of her estate. The Trustee handled her estate in accordance with deceased’s wishes and claimed executor’s compensation in amount of $21,900.93 for work done.

 

The Trustee applied to pass estate accounts and the Respondents objected on the ground that cthe ompensation claimed was excessive and unreasonable.

 

The Trustee reduced her claim for executor’s compensation to $10,287.84.

 

The Court awarded the Trustee compensation of $8,986.84, stating that the Trustee is entitled to such fair and reasonable allowance for care, pains, trouble and time expended in administering estate.

 

While the practice has developed in Ontario of awarding compensation on basis of 2.5 per cent against, inter alia, capital receipts and capital disbursements, those fees will not be automatically or routinely allowed.

 

The determination of fair and reasonable compensation does not necessarily involve maintaining fidelity to fixed percentages. The work involved in carrying out the deceased’s wishes as set out in her will was relatively simple and uncomplicated, and did not require an inordinate amount of time. This was relatively uncomplicated estate to administer. There were no court proceedings to deal with . The work performed did not require great skill and ability.

 

Given quantum and nature of work involved in fulfilling work either as trustee or counsel, reliance on 2.5 percentages was unwarranted.

 

Capital receipts claim was reduced from $1,582.32 to $1,264.84 — Capital disbursements claim was reduced from $1,483.52 to $500 — Total amount of executor’s compensation was $8,986.84.

 

The Law

 

The Trustee ActRSBC provides that a trustee is entitled to such fair and reasonable allowance for the care, pains, trouble and the time expended in administering the estate.

 

7 In assessing the appropriateness or otherwise of an executor’s compensation, five factors should be considered namely;

 

1) the size of the trust;

 

2) the care and responsibility involved;

 

3) the time occupied in performing the duties;

 

4) the skill and ability shown; and

 

5) the success resulting from the administration.

 

See Toronto General Trusts Corp. v. Central Ontario Railway(1905), 6 O.W.R. 350(Ont. H.C.).

 

8 In some cases, proper compensation may be attained by the allowances of percentages. These percentages however, should be employed only as a rough guide to assist in the computation of what may be considered fair and reasonable compensation. The reliance on percentages in some cases may violate the true principle of fairness and reasonableness upon which compensation should be estimated. See Atkinson Estate, Re(1951), [1952] O.R. 685(Ont. C.A.) at page 698.

 

9 While a practice has developed in Ontario, of awarding compensation on the basis of 2 1/2 percentage against the categories of Capital Receipts, Capital Disbursements, Revenue Receipts and Revenue Disbursements along with a management fee on the gross value of the estate, these fees will not be automatically or routinely allowed. See: Jeffery Estate, Re, [1990] O.J. No. 1852(Ont. Surr. Ct.), page 4..

Court Declines to Remove Trustee

executtor not removedApplications to remove executors/trustees are common, and are not always successful with the court declining the application.

Miles v Vince 2013 BCSC 888 Removal of a Trustee

The petitioners husband settled the trust in 2007 and named the petitioner and her three children as the beneficiaries, and his sister, the respondent as the trustee.

 

The petitioner brought court application for the removal of the respondent has trustee, alleging that she had caused the trust to make imprudent loans, not in keeping with the object of the trust, for which she said was to provide for the settlers wife and children after his death.

 

The trustee allege that the object of the trust was to develop certain social housing projects according to the settlers wishes.

 

The court found that there was no clear object stated in the trust instrument, and also found that there was no improper or imprudent conduct on the part of the respondent to warrant her removal as trustee.

 

THE LAW

 

45] As can be seen from the trust instrument in this case, the respondent trustee has extensive powers over the trust property. These powers are set out above and discussed further below. Notwithstanding these powers it is well-established that not even the broadest language in a trust instrument (including the inclusion of a privative clause) can displace the court’s jurisdiction to review the exercise of a trustee’s discretion in a number of areas. A previous decision discusses this as follows:

A privative clause protecting the exercise of a trustee’s discretion will not be effective to prevent judicial review whenever the trustees:

1. have failed to exercise the discretion at all (Re Floyd [[1961] O.R. 50 (H.C.)], Re Blow [(1977), 18 O.R. (2d) 516 (H.C.)], and Re Sayers and Philip [(1973), 38 D.L.R. (3d) 602 (Sask. C.A.)];

2.have acted dishonestly (Gisborne v. Gisborne [(1877), 2 App. Cas. 300 (H.L.)], Re Sayers and Philip, Cowan v. Scargill [[1984] 2 All E.R. 750], Re Floyd);

3. have failed to exercise the level of prudence to be expected from a reasonable businessman (Re Sayers and Philip, Cowan v. Scargill); and

4. have failed to hold the balance evenly between beneficiaries, or have acted in a manner prejudicial to the interests of a beneficiary (Re Jeffery [[1948] O.R. 735, (H.C.)], Re Sayers and Philip).

This is a non-exhaustive list and taken from Boe v. Alexander, 41 D.L.R. (4th) 520, 15 B.C.L.R. (2d) 106 (C.A.); citing with approval the trial judgment under appeal at 21 E.T.R. 246.

[46] The primary allegation of the petitioner in this case is that the trustee respondent did not act prudently when she made the Loan, from the Insurance Trust to the Family Trust, and her actions were prejudicial to the interests of the beneficiaries. There is no serious issue that the trustee has not exercised her discretion at all. As well, the petitioner is very concerned about the actions of the respondent but those concerns are not framed in terms of honesty in this application.

[47] Section 15.2 of the Trustees Act, R.S.B.C. 1996, c. 464, states that a trustee, when investing trust property, “must exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments.” This appears to codify the common law on the standard of care of a trustee and another decision (Collett Estate (Re), 2009 BCSC 1800, 53 E.T.R. (3d) 271) discusses the history and elements of this as follows:

[74] The decision of Quijano J. in Nichols [Neville v. Central Guaranty Trust Co., (1995)13 B.C.L.R. (3d) 137)] provides a helpful review of the law relating to the standard of care expected of executors and trustees:

[26]The case of Fales et al v. Canada Permanent Trust Co. and Wohlleben v. Canada Permanent Trust Co. (1976), 70 D.L.R. (3d) 257 (S.C.C.) dealt with, amongst other things, the standard of care required of the trustees under a will with respect to exercising the powers granted to them under the will. In that case the trustees had been given the power to invest and keep invested the assets of the estate where income was for the benefit of a life tenant and the capital was to go to residuary beneficiaries. In dealing with the question of the standard of care Mr. Justice Dickson, speaking for the court, said at pp. 267-268:

Traditionally, the standard of care and diligence required of a trustee in administering a trust is that of a man of ordinary prudence in managing his own affairs (Learoyd and Carter v. Whitely et al. (1887), 12 App. Cas. 727 at p. 733; Underhill’s Law of Trusts and Trustees, 12th ed., art. 49; Restatement of the Law on Trusts, 2nd ed., para. 174) and traditionally the standard has applied equally to professional and non-professional trustees…. Every trustee has been expected to act as the person of ordinary prudence would act. This standard, of course, may be relaxed or modified up to a point by the terms of a will and, in the present case, there can be no doubt that the co-trustees were given wide latitude. But however wide the discretionary powers contained in the will, a trustee’s primary duty is preservation of the trust assets, and the enlargement of recognized powers does not relieve him of the duty of using ordinary skill and prudence, nor from the application of common sense.

[27]The trustee has a duty to all beneficiaries. In Re Stekl; Lauer v. Stekl and Public Trustee, [1974] 6 W.W.R. 490 (B.C.C.A.) McIntyre J.A., dealing with a claim of a beneficiary as to a life interest in an estate for an order compelling the trustee to convert the property of the estate to income producing so that her life interest might be of some benefit to her, said at p. 494:

It is well settled that a trustee must deal evenhandedly between different classes of beneficiaries. This, of course, is the reason for the rule in Howe v. Dartmouth where that case is applicable. While as I have found there is a requirement that a conversion be made here, there is as well an undoubted power to postpone. In the absence of mala fides on the part of the trustee, and none is suggested here, that power may not as a general rule be gainsaid. Nevertheless the interests of the life tenant must be protected….

[28]In Law of Trusts in Canada Professor Donovan Waters says, at p. 788:

…That duty must be discharged with honesty, objectivity and care, but that is all. Impartiality lies in the presence of an honest and objective evaluation of each named beneficiary’s position, and a consequent decision. The same is true when trustees have a power of encroachment over capital in favour of joint life tenants, or even a power of appointment over capital. The duty of impartiality has been breached when honesty, objectivity and care are all present, but the result is one which favours Beneficiary A over Beneficiary B without an express or implied authority from the trust instrument….

Perhaps the principal impact of the rule upon trustees, however, is when they must administer the trust assets in such a way that they provide fairly for the beneficiaries whose interests in the trust property are successive.

[75] Counsel for Public Trustee also brought to my attention the following additional passages from Law of Trusts in Canada, 2nd ed. (Toronto: Carswell, 1984) at 690, where Professor Waters provides some useful observations relating to the duties of a trustee:

The obligation which lies at the base of trusteeship has resulted in there being three fundamental duties applicable to all trustees. First, no trustee may delegate his office to others; secondly, no trustee may profit personally from his dealings with the trust property, with the beneficiaries, or as a trustee; thirdly, a trustee must act honestly and with that level of skill and prudence which would be expected of the reasonable man of business administering his own affairs. These might be called the “substratum” duties, to which the duties associated with the particular trust are added.

[48] Turning to the specific issue of removal of a trustee, as requested by the petitioner in this case, the courts have jurisdiction to grant that remedy. The primary concern is the welfare of the beneficiaries:

It is not disputed that there is a jurisdiction ‘in cases requiring such a remedy,’ as is said in Story’s Equity Jurisprudence, s. 1287, but there is very little to be found to guide us in saying what are the cases requiring such a remedy; so little that their Lordships are compelled to have recourse to general principles.

Story says, s. 1289, ‘But in cases of positive misconduct Courts of Equity have no difficulty in interposing to remove trustees who have abused their trust; it is not indeed every mistake or neglect of duty, or inaccuracy of conduct of trustees, which will induce Courts of Equity to adopt such a course. But the acts or omissions must be such as to endanger the trust property or to show a want of honesty, or a want of proper capacity to execute the duties, or a want of reasonable fidelity.’

(Letterstedt v. Broers (1884), 9 App. Cas. 371, at p. 385 (H.L.); cited in Conroy v. Stokes, [1952] 4 D.L.R. 124 at pp. 126-127; also Re Estate of Andre Jacques Blitz, Deceased, 2000 BCSC 1596 at paras. 21-22).

[49] From the above discussion I conclude that the proper characterization of the issue in this case is whether the respondent, as the sole trustee of the Insurance Trust, exercised the care, skill, diligence and judgment of a prudent investor with regards to the loan from the Insurance Trust to the Family Trust in December 2009. Further, have the actions endangered the trust property that is to be managed for the benefit of all beneficiaries of the Insurance Trust

Court Declines to Remove Trustee – Orders Construction of Trust

Court Declines to Remove Trustee

Winkler v Winkler 2012 BCSC 1949 involves an application by the surviving widow of the deceased, in her capacity as comity of the person and estate of the deceased, sought an order that her stepson be removed as a trustee of her late husband’s alter ego trust number three, and that his longtime accountant be appointed in his place. Remove trustee.

The proceeding arose as a result of the breakdown of the relationship between the trustee and the widow.

 

The property consisted of three port Moody properties valued at between eight and $10 million.

The beneficiary of the trust was the wife and for other persons after his death, including his son the trustee, Andrea his remaining children.

The court dismissed the petition to remove trustee and appointment accountant, with leave to amend to obtain construction of the trust instrument. The relationship of the trustee as residual beneficiary was not sufficient to disqualify him from being trustee. His actions were, while lacking transparency from the wife’s perspective, did not indicate imprudence or any violation of the trust.

 

Disagreements concerning the proper construction of the trust is related to what trust property was an advances on capital is a related to the wife’s maintenance, were subject to a further application to construe the trust.

 

The general principles concerning the removal of trustees are set out in cases such as Conroy v. Stokes, [1952] 4 D.L.R. 124 (B.C.C.A.), and Letterstedt v. Broers, [1884] 9 A.C. 371 at 385-387. The jurisdiction to remove trustee is a “delicate” one, and in each case the main guide must be the welfare of the beneficiaries.

[7] The power to remove a trustee is ancillary to the Court’s principal duty of ensuring that the trusts are properly executed. The question in each case is whether the circumstances are such that the continuance in office of the trustee would be detrimental to the trust: Dicks v. Dicks Estate, 2010 NLCA 35 at para. 50, 298 Nfld. & P.E.I.R. 1.

[8] In Rose v. Rose (2006), 81 O.R. (3d) 349, 24 E.T.R. (3d) 217 at para. 70, (Ont. S.C.J.), Lissaman J. enumerated some actions, failures to act, and conditions that render remove trustee, including misconduct, lack of bona fides, an inability or unwillingness to carry out the terms of the trust, incapacity, personally benefiting from the trust, and acting to the detriment of the beneficiaries.

13] In my view, the respondent’s discontinuance of payments in light of the changed circumstances of the children is properly explained. Of course, Louis Winkler also supported his wife of many years from the income from the trust assets, which is entirely appropriate. In light of my disposition of this matter, the court will have to consider whether the respondent’s actions are consistent with his interpretation of the trust. I do not think that a mere potential for a conflict of interest is sufficient reason to interfere with a trustee’s appointment: Re: Estate of Andre Jacques Blitz, Deceased , 2000 BCSC 1596 at para. 25, 35 E.T.R. (2d) 172.

Breach of Fiduciary Duty

Breach of Fiduciary dutyBreach of Fiduciary Duty

In Elder Advocates of Alberta Society v. Alberta, 2011 SCC 24, [2011] 2 S.C.R. 261(S.C.C.), the Supreme Court of Canada concisely described the nature of a fiduciary relationship.

At para. 22, the Court observed that the doctrine relating to fiduciary duty arises out of trust principles. It requires the fiduciary to act with absolute loyalty toward the beneficiary in managing the beneficiary’s affairs.

In general terms, a fiduciary relationship comprises the following characteristics:

 

1. The fiduciary has scope for the exercise of some discretion or power;

 

2. The fiduciary can unilaterally exercise that power or discretion so as to affect the beneficiary’s legal or practical interests;

 

3. The beneficiary is peculiarly vulnerable to or at the mercy of the fiduciary holding the discretion or power: see Elder Advocates of Alberta Societyat para. 27.

 

An estate trustee, such as the defendant, is in a fiduciary relationship with the beneficiaries of the estate. By the terms of the will, the testator creates a trust and places the executor as trustee with authority over that trust. The trustee has the freedom to refuse the appointment; however, when he accepts the appointment he is bound by his fiduciary obligations. Accordingly, he must forsake the interests of all others in relation to the legal interest at stake in favour of the beneficiaries of the trust: Elder Advocates of Alberta Societyat paras. 30 – 31.