Author: Garrett Horrocks
In Tuesday’s blog, I scratched the surface of the recent battle between titans of Wall Street and a social media community over shares of GameStop, a brick-and-mortar video game retailer. The enormous volatility seen in GameStop’s share price, fluctuating between $20 and $350 in a matter of only a few weeks, led to some investors profiting handsomely, leaving others, including certain institutional investors, to foot the bill so to speak. Today’s blog discusses the obligations of a trustee to prudently invest trust capital and to generally avoid high-risk, high-reward strategies unless specifically instructed.
Section 27(1) of Ontario’s Trustee Act provides that a trustee investing trust assets “must exercise the care, skill, diligence and judgment that a prudent investor would in making investments” – colloquially known as the Prudent Investor rule. A further subsection of the Trustee Act, section 27(5), sets out a non-exhaustive list of criteria that a trustee is to consider when making investment decisions which include, among others, the expected total return on investment.
A savvy but risk-prone hypothetical trustee might have viewed the GameStop saga as an opportunity to earn significant returns for the benefit of the trust. Of course, had such a trustee “gotten in early” when the share price was still low and also correctly predicted the meteoric rise, the trust in question might well have enjoyed a capital return many times the size of their initial investment. Great!
However, the opposite consideration is relevant to any discussion of a trustee’s obligation as a prudent investor. What if the trustee took steps to invest in GameStop or any other volatile security, without reasonable justification for doing so, and suffers substantial losses? What recourse, if any, is available to the beneficiaries of a trust that suffers such losses?
In the ordinary course, a trustee may be personally liable for any investment losses as a result of imprudent investment decisions. Whether the trustee committed a breach of his fiduciary duty by choosing to invest in high-risk, high-reward securities is a nuanced question. In carrying out their obligation as a prudent investor, a trustee must consider several factors, including:
- The terms of the trust instrument or Will including any investment guidelines contemplated by the grantor or testator;
- The guidelines of any investment plan or strategy relied on by the trustee in making investment decisions, including any such plan prepared by a professional advisor; and
- The nature and extent of the investment made and the loss suffered.
A consideration of the factors above will determine whether a trustee’s actions constitute a breach of fiduciary duty. Hypothetically, a trustee may be directed by the terms of the governing instrument to invest a certain portion of the capital into specific types of assets, which could include volatile securities, with asset diversification as a main goal.
Although such investments might not ordinarily be viewed as “prudent”, section 27(9) of the Trustee Act provides that a trustee is not authorized to act in a manner that is inconsistent with the terms of the governing instrument. Although the trustee has some discretion in terms of the choice of investment, they may nonetheless be directed by the instrument to engage in risky transactions.
As such, the risk of personal liability to a trustee who was directed to invest a small share of the total capital of a trust into high-risk securities, as compared to a trustee who unilaterally decides to invest half of the trust capital into similar assets, will be considerably different. Provided the conduct of the trustee is in accordance with the directions and reasonable professional guidance offered to them, it is unlikely that a trustee will be personally liable for investment losses.
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Late last month, I and many of my colleagues of the Millennial age were treated to a flurry of headlines that many of us in that age bracket were able to piece together, but which might have left those of a more senior generation scratching their collective heads. The battle between Wall Street and an army of social media users over stock trading perhaps led to some new terminology entering the lexicon of those beyond the Millennial age group. No doubt the words ‘Reddit’, ‘subreddit’, and ‘GameStop’ caused a few crossed eyes. Allow me to explain.
GameStop Corporation is a publicly traded company that, for much of the 1990s and early 2000s, operated a slew of brick-and-mortar retail stores selling video games, consoles, and other associated merchandise worldwide. As a bright-eyed middle-schooler during the height of GameStop’s market control, many a Friday night was spent wandering the aisles with friends eagerly looking to spend my allowance on the next craze.
As a result of a shift in the direction of the video game industry towards digital and online fare, as well decreased engagement as a result of the pandemic, GameStop’s brick-and-mortar sales model, and retail models more generally, saw a historic decline in sales and revenue. As the demand for GameStop’s business model declined, so did its share price.
This decline did not go unnoticed by certain savvy Wall Street hedge funds and other institutional investors. Shares in GameStop were a popular purchase among “short sellers” looking to turn a profit as a result of the company’s misfortunes. Briefly summarized, short-selling occurs when an investor borrows a particular stock from a stockholder, then sells that stock to a third-party investor willing to pay current market price for the security, on the short-seller’s expectation that the share price will have decreased by the time the loan from the original stockholder is called. The short-seller would then repurchase the borrowed stock from the third-party investor at the now-lower share price before returning ownership to the original stockholder and earning a profit on the difference.
In the case of the GameStop saga, the short-selling attempts by some large hedge funds and institutional investors did not proceed as planned. Members of a specific community under the Reddit platform – individually, a ‘subreddit’ – discovered in late 2020 that GameStop stock had been ‘shorted’ to an unprecedented degree. In essence, hedge funds and investors had bet significant sums on the continued decline of GameStop, intending to turn a profit as the share price was expected to continue dropping.
Members of the ‘WallStreetBets’ subreddit saw an opportunity to ‘squeeze’ the investors by collectively purchasing a significant portion of the available stock in GameStop, driving up the price-per-share to historic highs and decimating the intended ‘short’. The price-per-share ballooned from around $20 in early 2021 to a staggering $350 per share by the end of January. Many of the investors and hedge funds who had bet on the price decreasing from $20 were now compelled by their loan obligations to repurchase shares at a price many times higher than their initial capital investment, incurring significant losses in the process.
Although the frenzy around GameStop and other publicly-traded companies such as AMC has died down in recent weeks, as of today’s date GameStop is still trading at around $51 per share, more than double the share price at the beginning of the year. The incident has also drawn the ire of securities regulators as well as the US Congress. Game over?
The next blog in this series will tie in the concepts of short-selling and the fundamentals at play in the GameStop incident to the obligations of fiduciaries to act as prudent investors.
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A recent CBC article demonstrates the importance of having a testator regularly review, or at least consider, their current estate plan to ensure that it conforms to their testamentary intentions, and the potential pitfalls of failing to do so or of failing to seek legal advice.
Eleena Murray, of Vancouver, British Columbia, died leaving a Last Will and Testament dated sometime in 2003. The Will provided cash legacies to various relatives, totaling approximately $440,000, and left the residue of Eleena’s estate to a charitable organization, the SPCA.
Although it is not clear, at the time the Will was drawn, it appears as if the residue of the Estate would have largely consisted of her interest in her house, situated in the Point Grey neighbourhood of Vancouver. Presumably, although it is unclear, the total value of all of the cash legacies was likely close to the fair market value of the house, such that Eleena intended to divide her estate roughly equally between the legatees and the charity.
However, in the years since the Will was drawn, the real estate market in Vancouver saw massive growth, with property values rising significantly, and the value of the residue of Eleena’s estate along with them. In 2017, perhaps recognizing what had become a considerable discrepancy between the values of the cash legacies and the value of the house, Eleena apparently drafted a handwritten note containing, among other instructions, an intention to limit the SPCA’s interest in her estate to a flat bequest of $100,000.
It is unclear whether the note was signed by Eleena or subscribed to by attesting witnesses (although two witnesses swore affidavits attesting to the fact that the note was prepared by Eleena). Eleena died only months later, without having amended her Will to reflect her purported intentions by way of the note. Although the value of the house, and therefore the residue of the Estate, increased significantly, Eleena never formally amended her estate plan.
Litigation has since ensued, with Eleena’s family members asserting that the handwritten note is a testamentary document that accurately represents her intentions.
Were this litigation taking place in Ontario, a court might find that the handwritten note would constitute a holograph will, assuming it was signed by Eleena. A holograph will is a will that is made entirely in the handwriting of the testator and signed by them, without the need for attesting witnesses.
In British Columbia, the analysis is slightly more nuanced. There is no equivalent provision under BC legislation that specifically recognizes the validity of holograph wills, as the Succession Law Reform Act does in Ontario. That said, British Columbia’s Wills, Estates and Succession Act empowers a court to make an order that a record purporting to be a will if the court is satisfied that the document represents,
- The testamentary intentions of a deceased person;
- The intention of a deceased person to revoke, alter, or revive a will; or
- The intention of a deceased person to revoke, alter, or revive a testamentary disposition in a document other than a will.
The court is equally empowered to make an order that a will that is not made in conformity with the applicable legislation is equally as effective as if it had been.
In the case at hand, the prevailing question will likely be whether the court is satisfied that the handwritten note accurately represents Eleena’s testamentary intentions. If so, the subsequent issue to be considered is whether the balance of the Estate that is not dealt with pursuant to the note passes by way of an intestacy, but that is a topic for another day.
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In yesterday’s blog, I discussed the representation of unborn and unascertained parties in litigation in which their interests are affected. In such cases, the parties should obtain a representation order authorizing a chosen individual, or perhaps the Children’s Lawyer, to represent the interests of that unborn or unascertained person or class of persons. Today’s blog considers the opposite end of the litigation spectrum – settlement.
Rule 10 of the Rules of Civil Procedure empowers the court to appoint a representative to act on behalf of unborn and unascertained beneficiaries. Situations may arise in which such an appointment is not necessary at the outset of litigation, for example, where the unborn beneficiaries need not be named as parties, but which may become necessary to conclude a matter.
In particular, where the parties to litigation agree on terms of settlement, that settlement is subject to the approval of the court if it impacts the interests of a party under disability, such as a mi
nor. Similar principles apply to circumstances in which an unborn or unascertained beneficiary is not a party to a proceeding but is nonetheless “interested in the settlement” in accordance with Rule 10.01(3) of the Rules.
Rule 10.01(3) authorizes a party appointed by representation order to “assent to the settlement” entered into by the parties to the litigation. If the judge hearing the motion for court approval is satisfied that the settlement is “for the benefit of the interested persons who are not parties”, and the representative does, in fact, assent to that settlement, the court is empowered to approve the settlement on their behalf.
As a point of practice, although motions for court approval on behalf of parties under a disability have strict requirements as to the nature and content of the materials to be filed, there is no such strict requirement for approval motions brought pursuant to Rule 10. That said, parties bringing such motions would be well advised to comment on the benefits of settlement from the perspective of the unborn and unascertained beneficiaries in order to assist the court.
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Prudent estate planning techniques frequently lead a testator or settlor to contemplate gifts or distributions to alternative beneficiaries to whom they do not necessarily intend to convey an express interest.
Often, these gifts-over are made in contemplation of a particular condition coming to pass – for example, where the intended beneficiary predeceases the testator. Failing to account for such instances could result in a lapsed gift (subject to the applicability of the anti-lapse provisions at section 31 of the Succession Law Reform Act), a partial intestacy, or, more generally, the conveyance of an interest to a person that the testator did not intend to benefit.
Although gifts-over are generally granted in favour of individuals of the testator’s choice, to maximize their control over their estate, that need not be the case. Gifts-over may be made in favour of individuals who may not yet have been born, such as the issue or lineal descendants of a testator’s young grandchildren. When litigation that impacts the interests of these unborn or unascertained beneficiaries arises, the first questions that ought to come to a litigator’s mind are who should be appointed to act on their behalf, and how should that appointment be achieved?
One’s mind might immediately jump to the appointment of a litigation guardian. In the case of a beneficiary who is a minor, that would be correct. Pursuant to Rule 7 of the Rules of Civil Procedure, a party under disability (which would include a minor) must be represented by a litigation guardian. Furthermore, the Children’s Lawyer is the presumptive litigation guardian for all minors unless and until another individual files an affidavit following specific criteria set out at Rule 7.02.
However, where the interests of an unborn or unascertained person or class of persons is concerned, recent direction from the Children’s Lawyer suggests it is Rule 10, not Rule 7, that guides us. Rule 10.01 empowers a judge to appoint a person to represent “any person or class of persons who are unborn or unascertained” who have a present, future, contingent, or unascertained interest in the subject matter. Strictly speaking, an unborn or unascertained individual is not a person under disability or a minor as defined under the Rules, and so a litigation guardian, although filling a similar role as a representative, should not be appointed.
As a point of practice, a party seeking a representation order would be well advised to serve the Children’s Lawyer whether or not the applicant is seeking to have the Children’s Lawyer act as representative, or whether another individual is seeking that appointment. Although Rule 10 differs from Rule 7 in that the latter requires the Children’s Lawyer to have notice of any motion to appoint a litigation guardian while the former does not in the context of a representation order, it is nonetheless recommended that the Children’s Lawyer be given notice to ensure the interests of the unborn beneficiaries are appropriately represented.
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A recent decision of the Superior Court of Justice, Cormpilas v Ioannidis, reaffirmed the importance of clarity of language in asserting legal or equitable claims particularly when such claims are asserted outside of formal litigation proceedings.
The decision concerned the remedies available to co-owners of a property arising as a result of the laissez-faire conduct of the other co-owner. The property in question had been owned by two separated spouses as tenants in common, each of whom devised their respective interests in the property to different parties. The wife, who died in 2012, left her interest in the property to the Applicants, being four of her grandchildren. The husband, who died in November 2017, left his interest to one of his sons, being the Respondent. The Respondent was the uncle of each of the Applicants.
The Respondent had moved into the property with his spouse and family to care for his father several years prior to his father’s passing, although he continued to reside there, rent-free, for a number of years thereafter. The Applicants had made overtures shortly after their grandfather’s passing about wishing to sell the property and threatening to move for partition and sale, but the Respondent remained. The Applicants commenced an application in February 2019 in which they asserted a claim of unjust enrichment against the Respondent arising from his continued sole occupation of the property despite the Applicants’ interest in it. The Applicants sought orders for retroactive payment of occupation rent, or damages in the alternative.
The Court agreed that the Respondent had been unjustly enriched to the detriment of the Applicants and held that an award for payment of occupation rent was an appropriate remedy. However, the Court’s opinion of the period for which such rent would be payable differed from that of the Applicants, primarily owing to the Applicants’ failure to clearly particularize their claim.
The Applicants asserted that they were entitled to payment of occupation rent from November 2017 until the date the Respondent vacated the property, which eventually came in April 2020. The Applicants’ position was based in part on the fact that they had purportedly conveyed to the Respondent, shortly after their grandfather died, that the property should be vacated and sold, or otherwise that the Respondent should buy out the Applicants’ interest. The Respondent did neither. As such, the Applicants claimed they were entitled to occupation rent from date of death onward.
The Court disagreed with the Applicants’ position and awarded occupation rent payable only from the date the Application was issued to the date the property was vacated. The Court declined to go further on the basis that the Applicants had not clearly conveyed their intention to assert a claim for occupation rent against the Respondent as a result of his possession of the property. Although the Applicants referred to a demand letter in which they specifically characterized the Respondent as a tenant, that letter also authorized the Respondent to continue residing there without making reference to an intention to seek payment of occupation rent. In the absence of specific evidence to the contrary, the Court held the notice of application to be the earliest claim by Applicants for payment of occupation rent. The Court was clear that it was not prepared to infer that the Applicants had asserted claim for payment of occupation rent.
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The court’s authority to approve settlements of claims that impact the interests of persons under a legal disability, including minors and incapable persons, is well-known. Rule 7.08 of the Rules of Civil Procedure provides that any settlement of claims made by or against a person under disability is not binding unless approved by a judge. Implicit in this Rule is that the court is to ensure that a settlement impacting the rights of individuals who cannot legally consent to such a settlement is, in fact, in the best interests of those individuals.
Rule 7.08(4) lists the court material that must be delivered as part of any such motion for court approval and includes, among other items, an affidavit of the lawyer acting for the litigation guardian of the incapable person “setting out the lawyer’s position” vis-à-vis the proposed settlement. In the recent decision of the Superior Court of Justice in Grier v Grier, the Court grappled with the extent of the lawyer’s obligations in preparing such an affidavit, particularly when questions of privilege are invoked.
In the Grier decision, the parties to the litigation had agreed on terms of settlement. However, as they were both under a legal disability, the parties brought a motion seeking court approval of the settlement not only on their behalf, but also on behalf of two non-parties whose interests were impacted by the settlement. One of the non-parties, S, brought a subsequent motion seeking copies of the materials exchanged by the parties in the litigation generally, as well as on the motion for court approval.
The court denied the former on the basis that the non-party was not entitled to service of any court material exchanged by the parties unless otherwise ordered by the court, as she had not filed a Notice of Appearance. As to the latter, the parties had previously agreed to an order that the two non-parties would be entitled to service of materials relating to settlement. As such, the court found that S was entitled to service of the materials for the motion for court approval.
However, the main issue before the court related to the adequacy of the materials produced. The parties had each served the non-parties with incomplete motion materials, including affidavits of counsel for the litigation guardians which had select sections omitted on the basis of privilege. S, as moving party, sought disclosure of the complete motion materials inclusive of the omissions.
The Court considered the authorities, including the Rivera and Boone decisions, and held that lawyers delivering affidavits pursuant to Rule 7.08(4) ought to be more than capable of doing so without breaching privilege. The lawyer’s obligation in that respect is to simply provide assurance to the court that they advised their client as competent counsel would and that the settlement is in their client’s best interests.
Should counsel go further than is required under the Rule, then as the judge in Boone pithily held, “that is counsel’s problem.” If necessary, alternative relief, such as sealing orders, may be considered, but at first instance, it is clear that the court will expect counsel to be able to draft materials in such a way so as to discharge their obligation without butting up against questions of privilege.
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My colleague, Sydney Osmar, blogged in June on a summary of actions taken by the Ontario Legislature to issue, and later extend, the terms of certain orders issued in the days following the provincial state of emergency declared on March 17, 2020. These orders were intended to provide direction in light of the procedural and administrative concerns arising as a result of the immediate suspension of courthouse operations that followed the declaration of the state of emergency and, in particular, the effect of the declaration on litigation time periods provided under the Rules of Civil Procedure.
The Legislature introduced two key regulations in an effort to provide guidance to the litigation bar. O.Reg 73/20, made on March 20, 2020, provided for an indefinite suspension of any limitation periods or period of time within which litigation steps were to be taken, as established by statute, by-law, or order of the Ontario government, for the duration of the state of emergency.
O.Reg 259/20, made on June 5, 2020, amended O.Reg 73/20 primarily in decoupling the suspension from the “duration of the emergency” to a fixed date of September 11, 2020, in order to provide certainty and predictability to members of the litigation bar. The Emergency Management and Civil Protection Act provides that temporary suspensions by emergency order shall not exceed 90 days, hence the choice of a fixed date of September 11. However, the Legislature remains empowered to issue further orders extending the suspension beyond the chosen date should such deferrals be required in light of the pandemic.
As of the posting date of this blog, no further guidance or direction has been delivered by the Legislature with respect to a suggested extension of the suspension period. Although the circumstances are such that direction in that respect may be received on minimal notice, this blog is intended to serve as a mere reminder of the upcoming expiration of the suspension period or, in other words, the resumption of applicable litigation timings.
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My last blog discussed recent steps taken by the legislature to modernize the administrative side of the practice of law in Ontario. The practical side has also seen a number of developments that have emerged as a direct result of the ongoing pandemic. Some of these efforts have been spearheaded by the courts directly, while others, such as the Estate Arbitration and Litigation Management initiative, have been developed by members of the Bar an in effort to continue moving matters towards a resolution despite limited court access.
A recent decision of the Superior Court of Justice provides some important commentary on the judiciary’s expectations of parties and counsel to adapt to the current reality using these tools and others so that files can continue to progress.
In Arconti v Smith, Justice Myers grappled with the competing views of the parties as to whether an examination for discovery ought to proceed by way of a videoconference. The defendant, who was to submit to examination, proposed that the examination proceed by way of videoconference given the social distancing guidelines in place.
The plaintiff objected on several grounds. Among other objections, the plaintiff argued that the defendant and their counsel ought to be in each other’s presence to ensure the process proceeded smoothly. Alternatively, the plaintiff argued that the fact of conducting an examination remotely would “[deprive] the occasion of solemnity” and would otherwise make it more difficult to assess the defendant’s demeanour as a witness. The plaintiff argued that the examination ought to be deferred until social distancing guidelines were lifted.
Justice Myers’ initial response to the plaintiff’s position was simple, yet persuasive: “It’s 2020.” He held that the parties have technological tools at their disposal to conduct examinations and other litigation steps remotely, and that the use of such tools was especially salient in the context of the social distancing guidelines. Although Justice Myers advised that the concerns raised by the plaintiff might be relevant in different circumstances, they were not at issue there.
Ultimately, Justice Myers held that the use of readily available technology should be part of the skillset required both of litigators and the courts, and that the need to use such tools was merely amplified, not created, by the pandemic. The plaintiff was ordered either to conduct the examination of the defendant by videoconference, or to waive their entitlement to conduct the examination altogether.
This decision provides a glimpse into the court’s expectations of litigants and counsel to move matters forward in spite of the social distancing guidelines and court closures. While the current directives and legislation cannot be used to compel a party to perform a particular litigation step by audiovisual means, one may read Arconti as suggesting that the courts will nonetheless expect the parties to consider the entirety of their skillset to move matters along so that they do not languish in litigation purgatory as a result of social distancing guidelines.
Once social distancing guidelines have been lifted, it will likely be some time before the courts have dealt with the matters that were adjourned between March and June and are in a position to hear new matters. Parties who are willing to use the tools at their disposal to move matters forward and avoid contributing to this delay may find themselves commended by the judiciary. Those who are resistant to adapt, on the other hand, may expose themselves to commentary from a judge, or possibly cost consequences for their client, depending on the circumstances.
If you are interested in learning more about litigation procedure and estate planning best practices in the time of COVID-19, please consult our information guide.
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As Ontario begins to witness a glimmer of relief from the ongoing COVID-19 pandemic, one cannot help but notice how the outbreak has forced the hand of many industries towards modernization, and law is no exception. Our firm has blogged extensively over the past two months on the multitude of changes to estate planning practices, litigation, and the practice of law in the province, more generally, the implementation of which is directly attributable to the new business reality. Wills may be executed in identical counterparts, rather than as a single a document, by way of audiovisual communication. Motions and other court hearings are being conducted virtually, and materials to be filed in respect of those hearings can be filed with the court registrar electronically.
Most recently, Bill 190, the COVID-19 Response and Reforms to Modernize Ontario Act, 2020, received royal assent on May 12, 2020 and implements modest, but impactful, changes to numerous statutes. These changes continue the trend of modernizing the practice of law to match the business realities of the circumstances by, for example, specifically authorizing or validating the electronic signature of certain documents, providing mechanisms for the filing of such documents, if need be, by electronic means, or generally allowing for certain practice components to proceed in a virtual capacity. The legislative goals of Bill 190 fit with the province’s broader mandate, in the words of the attorney general, to have “modernize[d] the justice system 25 years in 25 days.”
The Bill also includes a formal amendment to the Commissioners for Taking Affidavits Act to authorize a commissioner of oaths to administer an oath or declaration, generally in the form of an affidavit, without being in the physical presence of the deponent, provided the commissioner can “satisfy himself or herself of the genuineness of the signature.” In other words, this amendment authorizes a commissioner to administer an oath or commission an affidavit by audiovisual means provided the signature, and the act of signing, are made visible to the commissioner.
This amendment reflects an interpretive directive issued by the Law Society of Ontario in March. The prior version of this statute required both commissioner and deponent to be in the presence of one another for the oath to be validly administered. Though physical presence was not a strict requirement under the prior version, it was considered to be an element of best practice. In light of the recent restrictions in having a commissioner and a deponent meet together for the purposes of commissioning an oath, the Law Society issued this directive to ensure that the requirement could be satisfied in the absence of physical presence, thus authorizing the commissioning of oaths to proceed virtually. The amendments to this act set out in Bill 190 simply serve as a more permanent statutory codification of the directive issued by the Law Society.
Please feel free to review our other blogs dealing with the practice of law in a post COVID-19 reality:
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