A recent British Columbia Court of Appeal decision, Pirani v Pirani, 2022 BCCA 65 (CanLII) reminds us that both the structure of the trust instrument and the context in which the trust is set up may inform, alter, modify, or displace the scope of the fiduciary duty owed by a trustee to the beneficiaries of a trust.  

The Pirani family business involved a number of successful businesses, including hotels and motels which operated in Canada and the US. The family business was initially run by four brothers (the “First Generation Brothers”). In 1993, the brothers decided to reorganize the ownership of the two main operating entities, thus creating four family trusts that would benefit their respective families (the “Second Generation Beneficiaries”). The goal was that the future increase in the value of the family business would accrue to their heirs through each trust’s ownership of the underlying business. The First Generation would realize the value in the business through an immediate estate freeze and continue to retain control of the business going forward through numbered holding companies.  

A claim was brought by the beneficiaries under one of the family trusts following the reorganization, second estate freeze, and wind up of the four family trusts. The plaintiffs alleged that the unequal distribution of the family business that had been directed by the two trustees who remained active in the family business and supported by the one remaining First Generation Brother was a breach of their respective fiduciary duties as trustees under the four trusts.  

At trial, it was found that the trust structure inherently created a substantial risk that the trustees’ fiduciary duties could conflict with their duties arising from their roles as directors, their self-interest in the underlying business, and their interests as Second Generation Beneficiaries. The trustees were found to have breached their duty to act solely in the best interest of the respective trust beneficiaries, even though the trust agreement conferred on the trustees a broad, absolute, and unfettered discretion to distribute the trust capital to one or more of the beneficiaries to the exclusion of the other or others in such proportions and in such manner as the trustees determined. 

In reversing the decision of the Trial Judge, the British Columbia Court of Appeal observed that the correct legal analysis should consider whether the trust instrument displaced a broad fiduciary obligation to act only in the best interest of all beneficiaries with a more limited duty. In finding that it did, the Court noted: 

• The First Generation creators of the trusts envisaged that there would be overlapping roles of trustee and director and trustee and beneficiaries. The trust structure permitted the trustees to act in a coordinated fashion on behalf of all the trusts.  
• The trustee’s fiduciary duty under a trust agreement was to be interpreted with reference to the trust structure and the context in which the trust was established:  

“The structure of the Pirani family business empire and the foundational principles upon which it was based involved individuals occupying multiple, overlapping roles.” “It is not obvious the trustees breached any trust or fiduciary obligation in acting in a coordinated fashion to implement a plan for the corporate restructuring of the family business and wind up of the family trusts”.  

The Court of Appeal accordingly found that the duty imposed on the trustees of the Pirani family trust did not prohibit the ultimate, unequal result that benefited the trustees and beneficiaries who remained actively engaged in the business operation to the detriment of other beneficiaries. The fact that the defendant trustees benefited from continued control of the family business and the opportunity for future growth and profitability was not inherently a breach of trust given the language of the trust instrument and the corporate structure intended by the First Generation Brothers.  

Thank you for reading.  

Ian Hull & Susanne Myers