Tag: Trustee Issues

Debt to Estate Survives Bankruptcy Due to Breach of Fiduciary Duty

Debt to Estate Survives Due to Breach of Fiduciary Duty

Kingston Estate v. Charrette(2011), 2011 ONSC 7126, 2011 CarswellOnt 14834(Ont. S.C.J.) was in favour of the Estate Trustee/Plaintiff and held that the Defendants, the Charrettes, had not been given a gift of $25,000 by the deceased as they had alleged. The Charrettes were ordered to pay to the Estate the sum of $25,000 together with pre-judgment interest and costs to the Plaintiff on a substantial indemnity basis.

The Charrettes, however, declared bankruptcy after the proceeding was commenced.

A second application was therefore made by the Estate Trustee seeking an order that these amounts (the “debt”) owed to the Estate by the Charrettes should not be discharged by their bankruptcy.

Because the Charrettes went bankrupt after the proceeding was commenced, the order that had been made would be worthless unless the debt created by his decision survived their bankruptcy.

The Estate Trustee sought an order that the debt was not discharged by the bankruptcy because it either (a) arose out of fraud, misappropriation or defalcation while they were acting as fiduciaries, or (b) resulted from obtaining the money by false pretences or by fraudulent misrepresentation.

The Estate Trustee, in the original statement of claim, had requested a declaration that the debt or liability owed by the Charrettes arose in circumstances set out in sections 178(1)(d) and (e) of the Bankruptcy and Insolvency Act (the “BIA”) which provides:

178(1) An order of discharge does not release the bankrupt from…(d) any debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity…; (e) any debt or liability resulting from obtaining property by false pretences or fraudulent misrepresentation;

The Estate Trustee’s counsel later requested an opportunity to address the issues under section 178 of the BIA which the Judge granted. Justice Ellies determined that the Court did have jurisdiction to consider the issues raised under section 178(1) of the BIA. Justice Ellies stated that as no formal order had yet been drawn up, he had the jurisdiction to deal with the order requested under section 178. He relied on the Supreme Court of Canada decisions in Paper Machinery Ltd. v. J.O. Ross Engineering Corp.(1934), 1934 CarswellNat 30, [1934] S.C.R. 186, [1934] 2 D.L.R. 239(S.C.C.) and, in particular, Chandler v. Assn. of Architects (Alberta)(1989), [1989] 6 W.W.R. 521, 36 C.L.R. 1, [1989] 2 S.C.R. 848, 70 Alta. L.R. (2d) 193, 40 Admin. L.R. 128, 62 D.L.R. (4th) 577, 99 N.R. 277, 101 A.R. 321, 1989 CarswellAlta 160, 1989 CarswellAlta 620(S.C.C.). Justice Ellies went further to say that even if the final order had been drawn up, issued and entered, it was clear from his earlier decision that the declarations sought were to be determined as a separate matter based upon the facts as he had found them. Therefore, there was no prejudice to the Defendants by granting the Estate Trustee’s request as they had been aware from the commencement of the proceeding that this type of order was going to be sought.

Justice Ellies then had to determine whether or not the debt or liability arose in the circumstances referred to in section 178(1)(d). He concluded that:

It was not necessary that a beneficiary communicate directly or even indirectly with a fiduciary in order to create a fiduciary duty. It is sufficient if the fiduciary is aware that the property in question is being held on behalf of the beneficiary and that the following things are true:

the fiduciary has scope for the exercise of some discretion or power;
the fiduciary can unilaterally exercise that power or discretion so as to affect the beneficiary’s legal or practical interests; and
the beneficiary is particularly vulnerable to or at the mercy of the fiduciary holding the discretion or power.

The Judge concluded that all three criteria had been met in this case and the award was not discharged by the bankruptcy.

It is therefore important, when commencing any litigation where the defendant is likely or has commenced a bankruptcy proceeding, to ensure that a claim is advanced for any amounts awarded by the courts that fall within the requirements of section 178 of the BIA.

– See more at: http://www.disinherited.com/blog/debt-estate-survives-bankruptcy-due-breach-fiduciary-duty#sthash.UgmmmoPV.dpuf

Court Refuses to Order Sale Despite Executor Acting Bona Fide

Acting Bona Fide

Hriczu v Bailey re Estate of Mackey 2011 BCSC 454 the issue before the court was whether a beneficiary could force the executor to sell a parcel of property and distribute the proceeds amongst the beneficiaries, where the executor had been holding the property for 11 years post death without sale.

The deceased died in 2000 and left a will which stated in clause 3(A) –

“my said trustee may in their uncontrolled discretion decide upon, or to postpone such conversion of my estate or any part or parts thereof for such length of time as they may think best, “

The aforesaid power to postpone a sale is an almost standard discretion provided in wills by most lawyers.

Most executors will not be willing or feel it is appropriate to delay a sale of property for as long as 11 years unless the property is unusual and has a particular

upside in value. In this particular case the parcel of property was 17.5 acres of undeveloped land in the agricultural land reserve , that had a value of $118,000

at the time of probate, but had since become 10 times more valuable.

The court held that so long as the executor had a bona fide intention to perform his obligation to convert the assets and to distribute them in accordance with the will, the exercise of his discretion should not be interfered with by the court.

In Lottman v. Stanford, [1980] 1 S.C.R. 1065, the Supreme Court of Canada considered a Will which directed the executors and trustees:

To sell, call in and convert into money all of my personal estate at such time and in such manner and upon such terms as my Trustees at their absolute discretion determine, with power to them to postpone such conversion… (at para. 2)

The court found that the executors were not under a duty to convert, and declined to compel the executor to convert the real property.

The following quote is taken form the decision:

[15] In Re Anthony’s (1977), 17 N.B.R. (2d) 364 (Q.B.), the executor and trustee of a Will which was strikingly similar to the Will before this court, applied for a determination of whether or not she had discretion to postpone the time for sale of property for so long as she deemed advisable. The application was brought 17 years after the testator’s death. The beneficiaries did not appear to speak to the matter.

The court, in holding that the trustee had a discretion to postpone the sale, said:

A trustee may exercise all such lawful powers as are expressly reposed in him by the instrument creating the trust and may use such discretion with respect to the time and manner and extent of exercising them as is permitted by the terms of that instrument. He must however, exercise the powers reasonably and in good faith and for the purposes for which they were created, after first making any needed enquiry.
The Court will not interfere with the bona fide exercise by a trustee of a discretionary power. Where the exercise of the power is obligatory but the time and manner of its exercise are discretionary, the trustee’s discretion in those respects will not be overridden by the Court.
Discretion, though absolute, must be exercised honestly, reasonably, intelligently and in good faith. And discretion must not be allowed to become an absence of responsibility Courts will not as a general rule interfere in the exercise of an absolute discretion by a trustee if the trustee acts honestly and fairly…

10 Subject to this, this Trustee, in my opinion, has a discretion to postpone the time for sale…

[16] I accept that those principles apply here. The Executor has been given a broad discretion to postpone converting (or selling) the land in question. That discretion must be exercised “honestly, reasonably, intelligently and in good faith”. It cannot be exercised in such a way as to give the executor a personal benefit or put him in a conflict of interest. It must also not be exercised in such a way as to defeat the purpose of the testator, which was to make a gift to each and every one of her five beneficiaries. In other words, the executor is not entitled to refuse to convert, or to postpone conversion indefinitely.”

How Much Should Executors Get Paid?

Unless the will provides otherwise, all executors whether lay or professional, whether experienced or not, are entitled to be paid remuneration in accordance with the provisions of Section 88 of the Trustee Act, R.S.B.C.

This section allows the executor to be paid, in the discretion of the court, up to a maximum of 5% of the gross aggregate value of the estate, including capital and income, together with an annual care and management fee of up to .4% of the average market value of the estate.

In most circumstances, the beneficiaries may well approve a 5% fee to the executor.

In many instances however, when contested, the courts will not allow the executor be paid the maximum 5% of the gross aggregate value of the estate.

The courts will enquire into a number of factors, including the complexity of the estate, the experience of the executor, the time spent by the executor, the value of the estate, the amount of time spent administering the estate, and the like.

However from a perusal of the somewhat limited number of cases on point, it would appear that the court very often will award fees more in the range of 2 1/2% to 3 1/2% rather than the maximum.

When beneficiaries cannot resolve the fee dispute, the court uses the following criteria in determining the amount of executor/trustee compensation, namely:

A. The time occupied;

B. The success achieved in the final results;

C. The amount involved in the estate;

D. The skill and ability displayed and required;

E. The care and responsibility involved

see McColl Estate (1967) 65 WWR 110 BCSC.

In The Estate of Farrugia aka Wagner 2012 BCSC 1031 at a determination to determine the executors remuneration, the court heard that one of two executors primarily administered an estate with an aggregate value of $442,000, and gross earned income of $229,000.

The court considered the relative complexity of the administration, and that much of the hands-on work had been done by that one executor in particular, who had spent 223 hours time administering the estate.

The court determined that the appropriate fee for that one executor should be 4% of capital and income, which amounted to $26,800, which the court equated to slightly more than $120 per hour.

Executor Removed For Borrowing Against Estate Asset

Executor Removed For Borrowing against an estate asset that went into foreclosure.

Stevens v Whittacker 2012 BCSC 1188 involves an application for the removal of the defendant executor and trustee of the parties mother’s last will and testament.

The executor had heavily mortgaged the estate properties which then went into foreclosure.

The court found that the defendant was in a conflict of interest and set aside his appointment as executor and trustee of the property, appointing the plaintiff in his place.

The court relied upon the following authority:

s. 31 of the Trustee Act, R.S.B.C. 1996, c. 464 states:

If it is expedient to appoint a new trustee and it is found inexpedient, difficult or impracticable to do so without the assistance of the court, it is lawful for the court to make an order appointing a new trustee or trustees, whether there is an existing trustee or not at the time of making the order, and either in substitution for or in addition to any existing trustees.

There is no question that an executor owes a duty to the beneficiaries and when there is an allegation of personal conflict of interest, he must step aside:

in Re Thomasson Estate, 2011 BCSC 481, citing Re Becker (1986), 57 O.R. (2d) 495.

– See more at: http://www.disinherited.com/blog/executor-removed-borrowing-against-estate-asset-went-foreclosure#sthash.0lK9ab8T.dpuf

The Executors Year

In the ordinary course, estate trustees are permitted a period of one year from the date of the death (sometimes described as the executors year) to gather in and realize estate assets, absent special circumstances that might indicate an abridgement of this one year period.

Re Engledow Estate 2001 CarswellOnt 2453

In Currie v Currie Estate 2005 PESCTD 64 the general rule was quoted from Feeney On Wills:

“In Baker v. Baker Estate, [1986] N.BJ. No. 185 at para 53, Godin, J. referred to Thomas G. Feeney, in The CanadianLaw of Wills, voL 1, Probate at p. 176:

(d) Realization of Assets (The ‘Executors Year)

The executor must not unreasonably delay in getting in the assets and settling the affairs of the estate and he will be personally responsible for any loss occasioned by undue delay. There is no hard and fast rule as to what constitutes undue or unreasonable delay, but it is the practice to speak of the executor’s or administrator’s year and the courts attach importance to the question whether the alleged failure to convert or realize assets which resulted in the loss to the estate occurred within or beyond a year. Therefore, all investments which are not proper to retain should be realized within a year of the testator’s death or, in the case of an administration, within a year of the date of the grant. It is the practice of the courts to consider that the estate ought to have been reduced to possession at the end of a year and to allow interest to then become payable on legacies, if there is any delay.”

The “executors year” developed as a rule of thumb in the common law, and provided that the executor of an estate has 12 months from the date of death to

call in the assets of the estate, pay the debts and liabilities, and to distribute the net assets to the beneficiaries in accordance with the provisions of the will.

The entire rationale for the rule is that executors must not unduly delay in the administration of the estate.

The Currie case provides that if this is not accomplished within a year, the beneficiaries have the right to demand interest on their gifts and to call in the executors to explain why the administration of the estate has not been completed.

There are of course many complicated estates together with litigation and other such difficulties that can easily delay the administration of the estate well

longer than a year. Some clauses in wills also give executors wide latitude in determining how and when to realize the estate, and these clauses are often

relied upon by executors to explain why the administration of the estate is taking longer than one year.

In the experience of disinherited.com most of the complaints relating to the executors year is often related to an executor that either cannot or will not deal with the estate for various reasons, usually emotional, or they are simply power tripping over the other beneficiaries and literally keeping them in the dark.

If either of these are the case scenario than the executor is typically at fault and may be removed as executor for proper reasons.

Words “Born After” Interpreted

“Born After” Interpreted in Two Express Trusts

Turk v Turk 2011 ONSC 6497 dealt with the various rules of construction and interpretation of the words“born after the date of the settlement” that were used in to family trust settled by a grandmother in 1992 and 1996, for the benefit of her two sons families.

One of the sons remarried after a divorce, and adopted two children who were 18 and 17 years of age at the time of their adoption.

Both were clearly born before, and not after, the date that the trust was settled.

The two sons brought an application to have the terms of the trust interpreted, which resulted in the adopted children not being beneficiaries of either trust.

After analyzing some of the general rules of interpretation, the court found that there was no ambiguity in the clause “born after the date of this settlement”, and that the words “born after” in particular, meant exactly what they said, and had no other natural meaning.

Some of the principles used by the court are as follows:

All parties agree that there is no Canadian case law, which is on all fours with the issues in the interpretation of these Trusts. One firstly looks at the Settlor’s intention as ascertained from the four corners of the Trust Settlements themselves and from the Trusts as a whole and not solely from the words used. See: James MacKenzie, Feeney’s Canadian Law of Wills, 4th ed. Looseleaf (Markham: LexisNexis Canada Inc., 2000) at para. 10.60.

Feeney’s, also says that if a Trust Deed describes a certain person with sufficient certainty to enable a Court to recognize the person intended by the settler, the Court will overlook the inaccuracy in the rest of the description. In my view, this principle cannot apply to the Trusts in question. Such descriptions relate to a beneficiary’ name, which is incorrectly spelled or misdescribed, such as a charity’s name. It can also apply when a testator or settlor describes someone as “my niece Ann Smith”, but that person is not blood-related to the testator or settler and whose name is actually “Anne Smith”, not the name shown in the document.

I have also reviewed the wording of Feeney’s in paragraphs 10.61,10.62,10.67,10.69, 10.71,10.80, 10.98,11.14,11.1,11.12,11.29 and 11.33.1 cannot see where any of these propositions apply to the wording of the Trusts. The clause in the Trusts is worded, “…and any other children of Jonah Turk born after the date of this Settlement, and the issue of such children”. There is nothing in this clause that is ambiguous or capable of two constructions. The words “born after” mean exactly what they say.

Nor can I find that the Settlor’s intention is not clearly expressed in the words used in the Trusts. The words “born after” cannot have any other meaning than their natural meaning.

There is no doubt as to the meaning of the words “born” and “after”. Any natural children Jonah may have in the future, and any infants or other children he may adopt who were born after the dates of the Settlements, would be included in the class described in the Trusts. Nor can I see where the Settlor had a general intent other than what the words themselves say in the Trusts.

There is no indication that she contemplated her son, Jonah, adopting adult persons or children who were almost adults and born “before” the dates of the Settlements, so that they would now be included in the classes of beneficiaries named in the Trusts.

The construction of the words of the Trusts is neither unjust nor absurd nor does the rule against disinheritance apply, as outlined in Feeney, in para. 10.80. The words “Jonah’s Family”, while now including his adopted children, is not a conflicting provision to “born after”. A conflicting provision must arise in the original wording of the Trust Deed, so that it is conflicting throughout the time from the Trust’s settlement date to the date of the interpretation. That is not the case here. The problem only arose when Jonah adopted persons born after the dates of the Trusts.

On the question of what is the Settlor’s intention, I adopt the traditional view on the interpretation of trusts as summarized in Lewin on Trusts 18th ed., John Mowbray et al., (Toronto: Thomson Sweet & Maxwell, 2008) at 200-201:

“Lifetime settlements are no different from other documents in that the subjective intentions of their authors are irrelevant. What counts is that the objective meaning that the words of the document convey to the court when considered as a whole in light of the surrounding circumstances.”

The intention that the court seeks is the intention as expressed; that is, the way in which the document is to be understood, not the purpose, motive, desire or other subjective state of mind of the settlor. The reason for the rule is that, otherwise, no lawyer would be safe advising on the construction of a written instrument, nor any party in taking under it.

Ad Hoc “Casual” Fiduciary Relationships

Sedin Estate v Rusin 2011 BCSC 1207 is an excellent example of financial abuse of an elderly person by a trusted financial advisor who was found to be in a casual and ” ad hoc “fiduciary relationships with the deceased.

The deceased and her husband became friends with the defendant financial advisor when the deceased was 69 years of age and the defendant was 32 years old. The deceased remained friends with the defendant after her husband’s death and in fact became dependent on the defendant for management of her finances as her health deteriorated.

The deceased was a modest woman and an unsophisticated investor who is the trial judge found, placed unwavering trust and reliance in the defendant and his abilities to manage her finances.

The deceased sold her house to the defendant’s company when she was 92 years old for $270,000.

The company issued a debenture as security but never made payments thus causing a significant loss to the deceased and her estate.

The executor brought action for damages arising from breach of fiduciary duty and the action was allowed.

The court found that an ad hoc fiduciary relationship existed between the testator and the defendant who had undertaken to look after the deceased financial well-being and to act in her best interests, and he accepted this role answer financial manager.

The defendant had power over the deceased finances, which he unilaterally exercised in a way that directly affected the deceased’s interests.

The deceased was exceptionally vulnerable to the defendant’s control, and the defendant was found to have breached his fiduciary obligation when he took advantage of the deceased by arranging for the sale of her house to his limited company.

In particular the defendant breached his fiduciary duty by providing worthless security for funds advanced by the deceased, and for failing to repay the principal amounts that the deceased invested with him.

The following exerpt of law is from the Sledin case:
Fiduciary Relationships

64 Certain relationships on account of their very nature result in fiduciary obligations for one of
the parties. For example, a lawyer has a fiduciary obligation to his or her client and a trustee has a
similar duty to his or her beneficiary. These types of relationships are generally referred to as per

se fiduciary relationships.

An ad hoc fiduciary relationship is one that does not fall within the traditional categories of fiduciary relationships. Instead, it is one that arises out of the specific circumstances and dynamics of the particular relationship.
In dissenting reasons in Frame v. Smith, [1987] 2 S.C.R. 99 (S.C.C.) at para. 60, Wilson J. described what she considered to be the general characteristics of a fiduciary obligation as follows:

The fiduciary has scope for the exercise of some discretion or power.
1. The fiduciary can unilaterally exercise that power or discretion so as to affect the beneficiary’s legal or practical interests.
2. The beneficiary is peculiarly vulnerable to or at the mercy of the fiduciary holding the discretion or power.

These observations of Madam Justice Wilson were later endorsed in International Corona Resources Ltd. v. LAC Minerals Ltd., [1989] 2 S.C.R. 574 (S.C.C).
The Supreme Court of Canada revisited the issue of fiduciary obligations and the constituent elements of such relationships in Hodgkinson v. Simms, [1994] 3 S.C.R. 377 (S.C.C), and Perez v. Galambos, 2009 SCC 48 (S.C.C).
While the characteristics of a fiduciary relationship articulated in Frame continue to be relevant in determining whether such a relationship exists, the more recent case authorities have recast those characteristics and added to them.
It is now clear that for an ad hoc fiduciary relationship to exist, the court must be satisfied that one party undertook, either expressly or by implication, to act for the benefit and best interest of another party: Galambos, at para. 66.
Moreover, a relationship whose distinguishing feature is only the vulnerability or power imbalance of one party vis a vis another will not, without any additional features, meet the threshold of a fiduciary relationship: Galambos, at paras. 67 and 74.

Tracing and Accounting For Assets

Tracing & Accounting For Assets

It is very common in estate litigation that the form of an asset may change substantially over a period of time.

For example a bank account of cash can be converted into a stock portfolio, which in turn can be used to buy a house that is subsequently sold and put into long-term bonds.

As long as those funds can be identified, they can be traced and accounted for, and where appropriate and ordered by the court, transferred into the name of a rightful heir.

The principals relating to orders for tracing and accounting were articulated by Pitfield J. in Ruwenzori Enterprises Ltd. v. Walji, 2004 BCSC 741 at paras. 240-242 and 245, aff’d 2006 BCCA 448:

1] Neither tracing nor an accounting is a remedy. Each is a process designed to assist in the perfection of a remedy…

2] It follows that tracing is the process employed to identify and particularize the manner in which funds have been applied. The results of the tracing permit a claimant to determine whether it will opt for a proprietary remedy in respect of funds derived from it, or a monetary judgment in respect thereof.

3] An accounting is directed at the determination of profit, gain or loss derived from assets in respect of which tracing has identified a right to, and the claimant has opted to assert, a proprietary interest.

4] Upon termination of any part of the tracing process at their option or otherwise, [the plaintiffs] will be entitled to elect to apply to confirm a proprietary interest in respect of assets other than those in respect of which the election to do so has already been made and by virtue of my reasons granted, or to enter judgment for the amounts I have enumerated and to apply for judgment in respect of any additional funds identified by the tracing process.

Administrator Removed For Misconduct With Special Costs

Sahota v Sandhu 2012 BCSC 552 is an example of a very straight forward court application to remove and replace a court appointed estate administrator who flagrantly acted in breach of his duties.

His actions were clearly so egregious that there was little surprise or discussion in the courts removal of him as administrator.

The parties father died in 2008 intestate ( without a will).

The Court appointed the administrator who then breached his duties by transferring title to certain real properties initially to himself.

He then transferred title to his 6 siblings contrary to the terms of a court order.

The Court had little difficulty in ordering the removal of the son as administrator, transferring title to the properties into the petitioners’ names as administrator of the estate, requiring the removed son to pass his accounts , and ordering special costs against him.

Special costs typically means that the losing party must pay the winning side’s entire legal costs, and not just a portion of them, typically around 1/3 of the actual legal fees charged, as most orders for “costs” provide.

Special costs are usually reserved for situations where one parties conduct is so reprehensible that the court’s need to sanction that form of egregious behavior.

Executor Must Remain Neutral In Estate Litigation

Estate Litigation

Ketcham v Walton 2012 BCSC 175 involved an application by the executor for directions pursuant to section 86 of the Trustee act for an order authorizing the executor to follow the provisions of the deceased’s last will to defend any wills variation action and gifts as vigorously as possible, even to the extent of depleting the assets of the estate in the defense and appeal of such attack on the will.

In effect the executor was asking the court for directions on how he should govern himself in the face of the disinherited three adult children’s claim for relief under the wills variation act.

The deceased left his estate to friends and charities, and disinherited his three adult children entirely.

It was a most unusual directive to his executor to fight any contests brought against his will by the children, to the extent of depleting the entire assets of the estate.

The judge in fact had no difficulty in dismissing the executors application, and restated the law that the primary duty of an executor is to preserve the assets of the

estate, pay the debts and distribute the balance of the to the beneficiaries entitled under the will, or, in accordance with any order made under wills variation act.

An executor should not take sides between the beneficiaries or use estate funds to finance litigation on their behalf under the wills variation act.

The law anticipates that the executor will remain impartial between the opposing beneficiaries.

The decision in Quirico v Pepper estate (1999) 22 BCTC 32 was followed, as was Doucette v Doucette Estate 2008 BCSC 506, at paragraph 16 where Justice

Metzger states ” The law requires an executor to remain neutral.

Tag: Trustee Issues

Debt to Estate Survives Bankruptcy Due to Breach of Fiduciary Duty

Debt to Estate Survives Due to Breach of Fiduciary Duty

Court Refuses to Order Sale Despite Executor Acting Bona Fide

Acting Bona Fide

How Much Should Executors Get Paid?

How Much Should Executors Get Paid?

Executor Removed For Borrowing Against Estate Asset

Executor Removed For Borrowing against an estate asset that went into foreclosure.

The Executors Year

Words “Born After” Interpreted

“Born After” Interpreted in Two Express Trusts

Ad Hoc “Casual” Fiduciary Relationships

Tracing and Accounting For Assets

Tracing & Accounting For Assets

Administrator Removed For Misconduct With Special Costs

Executor Must Remain Neutral In Estate Litigation

Estate Litigation

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