Is there a duty to disclose the transfer of estate assets during estate litigation?

Is there a duty to disclose the transfer of estate assets during estate litigation?

When administering an estate, the issue of whether the estate owns an asset may become the subject of litigation. An interesting question arises if, during the litigation, the estate transfers ownership of that asset – is there a duty to disclose the transfer? 

According to the Ontario Court of Appeal, the answer to this question is yes, at least if the transfer affects a litigant’s ability to pay a costs award. This issue came before the court in Herold Estate v Curve Lake First Nation, 2024 ONCA 299 because the estate was unable to pay a $190,000 costs award after transferring the property that was the subject of the litigation to the estate trustee in his personal capacity. 

In this case, the estate not only failed to disclose the property transfer during the course of the litigation, but it also misled the court as to ownership of the property during the proceedings, reported at Herold Estate v. Canada (Attorney General), 2021 ONCA 579. The litigation centered on whether the estate owned three islands located in Lake Katchewanooka by virtue of the estate’s ownership of a particular lot of property, and more specifically, focused on whether ownership of the islands was affected by resolutions made by the Crown reportedly reserving the islands for the Curve Lake First Nation. During the proceedings before the Court of Appeal, the estate’s factum expressly stated that the estate was the registered owner of the lot, even though the estate had actually transferred ownership of the lot to the estate trustee more than five years earlier, shortly after the estate had commenced the litigation. 

In light of the transfer, the lack of disclosure, and the fact that the transfer was not discovered until after the costs award was issued, the Court of Appeal allowed an application by the Curve Lake First Nation to vary the original costs award under rule 59.06(2)(a) of the Rules of Civil Procedure to make the estate trustee jointly and severally liable. The costs award could be varied “on the grounds of fraud or facts arising or discovered after [the order] was made” since the failure to inform the court as to the transfer led to both the application judge and the Court of Appeal being under the misapprehension that the estate was still the registered owner” of the lot. 

In granting this relief, the court also held that the estate “was under a duty to disclose the transmission” of the property due to the strong relationship between the ownership of the property and the estate’s claim. 

While the estate trustee tried to argue that the Curve Lake First Nation should not be permitted to vary the costs award since it had failed to verify that the estate still owned the property before the costs award was issued, this argument ultimately failed – the Court of Appeal found that there was nothing to put the Curve Lake First Nation on notice that the estate’s representation that it owned the property “might be incorrect.” 

The estate and the estate trustee also argued, unsuccessfully, that the failure to disclose was an irregularity without consequence. The Court of Appeal held that the transfer of ownership engaged rule 11.01, which provides: 

Where at any stage of a proceeding the interest or liability of a party is transferred or transmitted to another person by assignment, bankruptcy, death or other means, the proceeding shall be stayed with respect to the party whose interest or liability has been transferred or transmitted until an order to continue the proceeding by or against the other person has been obtained.

In light of the property transfer and the engagement of rule 11.01, the court went on to find that the application should have been continued solely in the name of the estate trustee on his own behalf, in which case “he would have been responsible for costs.” The Court also pointed out that ”[h]ad the true facts been known before the costs order, costs could have been ordered against [the estate trustee]. He was never truly a ‘non-party’ to the litigation.”  

This case serves as a valuable warning to estate trustees – an estate trustee could be held liable for a costs award issued against an estate if that trustee takes the asset which is the focus of the litigation. The Court of Appeal affirmed that “[i]t would be contrary to the interests of justice to allow Mr. Herold to use the principle of finality to escape the costs consequences of the litigation because he carried it on in the name of the estate, of which he was the sole representative, without disclosing the transfer of the ownership that meant that he personally was the real litigant.” 

Thank you for reading, and have a great day. 

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