Tag: Breach of Trust
The Application to Pass Accounts serves an important function in the administration of estates and trusts, providing the beneficiaries with the ability to audit the administration of the estate or trust and raise any concerns through their Notice of Objection.
The procedure that is followed for the Application to Pass Accounts is somewhat distinct from any other court process, with the process being governed by rule 74.18 of the Rules of Civil Procedure. These procedural steps include the filing of the “Notice of Objection” and the “Reply” to the Notice of Objection, processes and documents which are distinct to the Application to Pass Accounts. Although the Application to Pass Accounts process differs in certain ways from a more traditional Application, at its core the Application to Pass Accounts is still an “Application” and not an “Action”, with the process designed to be more summary in process as compared to the typical Action.
I have previously blogged about the procedural differences between an “Application” and an “Action”, and how things like Discovery and Affidavits of Documents, as well as calling witnesses to give oral evidence, are generally not available in an Application. The same generally holds true for an Application to Pass Accounts, with there generally being no Discovery process or witnesses called at the eventual hearing for the passing of accounts, with the summary process designed to be adjudicated on the paper record of the documents contemplated under rule 74.18.
Although the simplified and summary process intended for the Application to Pass Accounts may present many benefits to the parties, including allowing the beneficiaries to pose questions and objections to the trustee without having to resort to potentially prolonged and expensive litigation as provided in a typical Action, it could present some challenges if the claims that are being advanced are complex or seek significant damages as the process may not allow for the full record to be adequately explored.
If the claims or issues which are being advanced in an Application to Pass Accounts are complex, such as for example claims that the trustee was negligent or committed a breach of trust, the summary process designed for the typical Application to Pass Accounts may not provide the depth of procedural process that the claims may deserve. Under such circumstances the parties may seek to direct and/or convert the complex objections into a separate triable issue, thereby potentially opening up the procedural processes more typically reserved for an “Action” such as Discovery or the calling of witnesses to the issue.
The process by which certain objections are directed and/or converted into a separate “triable issue” is governed by section 49(4) of the Estates Act, which provides:
“The judge may order the trial of an issue of any complaint or claim under subsection (3), and in such case the judge shall make all necessary directions as to pleadings, production of documents, discovery and otherwise in connection with the issue.”
Under section 49(4) of the Estates Act the court may direct any objection which fits under section 48(3) of the Estates Act, which includes allegations of breach of trust, to be separately tried before the court, with section 49(4) noting that the judge shall make necessary directions regarding pleadings, Discovery, and the production of documents for the objection.
If an individual wishes to direct an objection to be tried under section 49(4) of the Estates Act such an intention should be raised at the early stages of the Application to Pass Accounts, with an Order being sought which would specifically direct the objection(s) in question to be tried by way of Action. To the extent that such an Order cannot be obtained on consent a Motion may be brought regarding the issue, with the court also being asked to provide direction regarding the procedures to be followed for the triable issue.
Thank you for reading.
When concerns are raised about the conduct of an Attorney for Property, those raising the concerns often seek an Order compelling the Attorney for Property to commence an Application to Pass Accounts pursuant to section 42 of the Substitute Decisions Act. Should such an Application to Pass Accounts be commenced, the objecting party will often make allegations against the Attorney for Property that the incapable person and/or estate has suffered damages as a result of the Attorney for Property’s conduct, often seeking monetary damages against the Attorney for Property in relation to such objections.
An interesting question was recently posed to me in the context of such an Application to Pass Accounts for an Attorney for Property. Can the objecting party pursue damages against the Attorney for Property within the actual Application to Pass Accounts itself, or do they need to commence a separate claim against the Attorney for Property for the recovery of such damages?
The ability to pursue damages against an Estate Trustee within the Application to Pass Accounts process is well established by statute, with section 49(3) of the Estates Act providing:
“The judge, on passing any accounts under this section, has power to inquire into any complaint or claim by any person interested in the taking of the accounts of misconduct, neglect, or default on the part of the executor, administrator or trustee occasioning financial loss to the estate or trust fund, and the judge, on proof of such claim, may order the executor, administrator or trustee, to pay such sum by way of damages or otherwise as the judge considers proper and just to the estate or trust fund, but any order made under this subsection is subject to appeal.” [emphasis added]
Section 49(3) of the Estates Act makes it clear that a separate claim against an Estate Trustee is not necessary to pursue damages for breach of trust when an Application to Pass Accounts has been commenced, and that the Judge may order damages against the Estate Trustee within the actual Application to Pass Accounts itself. Perhaps importantly however, the Estates Act appears to suggest that section 49 only applies to a passing of accounts for an “executor, administrator or trustee under a will“, making no reference to an Attorney for Property. Sections 42(7) and 42(8) of the Substitute Decisions Act also set out the “powers of the court” in an Application to Pass Accounts for an Attorney for Property, with such provisions notably containing no reference to the ability to order damages against the Attorney for Property for any wrongdoing.
As there appears to be no statutory equivalent to section 49(3) of the Estates Act which specifically contemplates that it applies to Attorneys for Property, and the ability to pursue damages within the Application to Pass Accounts itself in other circumstances appears to be derived from statute, the question of whether there is a “legislative gap” as it relates to the ability to pursue damages against an Attorney for Property within an Application to Pass Accounts can at least appear to be raised. If such a “legislative gap” does exist, would this mean that a separate claim would have to be commenced by the objector to pursue such damages even when an Application to Pass Accounts was currently before the court?
When I have raised the question to other estate practitioners, some have suggested that while there may be no statutory authority to order such damages against the Attorney for Property within the Application to Pass Accounts, the court may have inherent jurisdiction to order such damages by way of a “surcharge order” in the Application to Pass Accounts. Some have also suggested that as section 42(6) of the Substitute Decisions Act contemplates that the procedure to be utilized on passing an Attorney’s accounts is to be the same as that as an executor’s accounts, that this should be read as evidence to show that section 49(3) of the Estates Act would apply to the passing of an Attorney for Property’s accounts. In response to this, I would suggest that it is at least questionable if section 49(3) of the Estates Act is “procedural” in nature, and, even if it is found to be procedural, whether the “powers of the court” provisions of sections 42(7) and 42(8) of the Substitute Decisions Act, which notably does not include the power to award damages against the Attorney for Property for wrongdoing, would trump section 49(3) of the Estates Act in any event.
I am aware of no decision which specifically addresses the issue of whether there is a “legislative gap” when it comes to whether damages can be sought against an Attorney for Property within the Application to Pass Accounts itself. While the issue may simply be academic at this time, it is not unforeseeable that someone could attempt to argue that an objector cannot seek damages against the Attorney for Property within the Application to Pass Accounts itself, and that a separate claim is required. If such an argument is successfully raised, and the length of time between the alleged wrong and the separate claim being commenced was such that the limitation period may have expired, it is not unforeseeable that the Attorney for Property may attempt to argue that the separate claim must now be dismissed as a result of the expiry of the limitation period.
Thank you for reading.
The facts in the new Supreme Court of Canada decision on trustee duties were previously set out in last Tuesday’s edition of this blog.
Valard Construction Ltd. v. Bird Construction Co. arose from a commercial matter in which Valard was a subcontractor in a construction oilsands project where Bird was the general contractor. Bird was the trustee of a labour and material payment bond that could have been available for Valard’s claim for unpaid invoices if notice of claim was given to the surety within a fixed time limit. Valard claimed against Bird when Bird failed to disclose the existence of the bond to Valard within the relevant time period.
Justice Brown, for the majority, found that Bird had a fiduciary duty to disclose the bond to Valard even though Valard did not explicitly ask about the existence of the bond until it was too late. In order to determine whether a breach of trust occurred, Justice Brown went on to consider what was required of Bird in order to discharge its duties to Valard because “the question is not what Bird could have done in this case, but what Bird should reasonably have done in the circumstances of this case to notify beneficiaries such as Valard of the existence of the bond” (paragraph 29). In concluding that the duty was breached in this instance, paragraph 26 is particularly instructive for the analysis:
Like all duties imposed upon trustees, the standard to be met in respect of this particular duty is not perfection, but rather that of honesty, and reasonable skill and prudence. And the specific demands of that standard, so far as they arise from the duty to disclose the existence of a trust, are informed by the facts and circumstances of which the trustee ought reasonably to have known at the material time. In considering what was required in a given case, therefore, a reviewing court should be careful not to ask, in hindsight, what could ideally have been done to inform potential beneficiaries of the trust. Rather, the proper inquiry is into what steps, in the particular circumstances of the case — including the trust terms, the identity of the trustee and of the beneficiaries, the size of the class of potential beneficiaries and pertinent industrial practices — an honest and reasonably skillful and prudent trustee would have taken in order to notify potential beneficiaries of the existence of the trust. But, where a trustee can reasonably assume that the beneficiaries knew of the trust’s existence, or where practical exigencies would make notification entirely impractical, few, if any, steps may be required by a trustee.
In this case, Justice Brown found that Bird could have reasonably discharged its duties by posting notice of the bond on its information board and that some method of notice was required of the company to notify beneficiaries like Valard with a caveat. The caveat being that, in some circumstances, nothing could be required to discharge this duty where industry practice and knowledge would render notice unnecessary.
Interestingly, what was or was not industry practice in this case was the question that divided the Court. For Justice Karakatsanis‘ dissenting opinion, she would have dismissed the appeal because Bird was not under an obligation to inform Valard beyond responding accurately when asked because this type of bond was common in this industry in her view.
Thanks for reading!
The Supreme Court of Canada released a decision last Thursday that is a must read for estates and trusts practitioners. Interestingly enough, Valard Construction Ltd. v. Bird Construction Co., 2018 SCC 8, arose from a commercial matter.
Bird was a general contractor for a construction project. When Bird subcontracted with Langford, Langford was required to obtain a labour and material payment bond which named Bird as trustee of the bond. If Langford was delinquent in paying its contractors, the bond would permit the contractor to sue and recover from Langford’s surety on the condition that notice of the claim must be made within 120 days of the last date in which work was provided to Langford. Langford became insolvent and some of Valard’s invoices went unpaid. Unfortunately, Valard was not notified of the existence of the bond and did not inquire about whether there was a bond in place until after the 120 day notice period. The surety denied Valard’s claim and Valard sued Bird for breach of trust. This matter was dismissed at first instance by the Alberta Queen’s Bench, dismissed again by the Alberta Court of Appeal, and finally reversed by the Supreme Court of Canada (with a dissent from Justice Karakatsanis).
Justice Brown for the majority (per McLachlin C.J., as she then was, Abella, Moldaver and Rowe J.J.) found that Bird had a fiduciary duty to disclose the terms of the trust, i.e. the bond, to Valard notwithstanding the fact that the express terms of the bond did not stipulate this requirement. Justice Brown was clear that “While the ‘main source’ of a trustee’s duties is the trust instrument, the ‘general law’ which sets out a trustee’s duties, rights and obligations continues to govern where the trust instrument is silent” (para.15). Justice Brown then went on to say that a beneficiary’s right to enforce the terms of the trust is precisely what keeps the trustee from holding the “beneficial as well as legal ownership of the trust property” (para. 18). Otherwise, no one would have an interest in giving effect to the trust.
With this logic in mind, Justice Brown developed the following framework at paragraph 19,
“In general, wherever “it could be said to be to the unreasonable disadvantage of the beneficiary not to be informed” of the trust’s existence, the trustee’s fiduciary duty includes an obligation to disclose the existence of the trust. Whether a particular disadvantage is unreasonable must be considered in light of the nature and terms of the trust and the social or business environment in which it operates, and in light of the beneficiary’s entitlement thereunder. For example, where the enforcement of the trust requires that the beneficiary receive notice of the trust’s existence, and the beneficiary would not otherwise have such knowledge, a duty to disclose will arise. On the other hand, “where the interest of the beneficiary is remote in the sense that vesting is most unlikely, or the opportunity for the power or discretion to be exercised is equally unlikely”, it would be rare to find that the beneficiary could be said to suffer unreasonable disadvantage if uninformed of the trust’s existence.”
Thanks for reading and more to follow later this week on Valard Construction Ltd. v. Bird Construction Co.
Remedies for breach of trust are commonly sought in estate litigation, most notably in the context of a contested passing of accounts application. An executor who mismanages the estate assets, makes a bad investment, or distributes to a stranger rather than a beneficiary can easily be found to be liable for either breach of trust or breach of fiduciary duty or both.
The remedies available to the disappointed beneficiary can, however, be complex. AIB Group (UK) Plc v. Mark Redler & Co. Solicitors, a 2014 decision of the United Kingdom Supreme Court, provides a comprehensive multi-jurisdictional overview of this interesting area of law.
The case considered the remedies available to a bank when the solicitors it engaged to secure a loan against property failed to adequately secure the bank’s interest. The Court noted that, in considering the remedies available for breach of trust, the Court must consider the different obligations of a trustee in order to evaluate the remedies that may be available for a given breach, such as:
(i) a custodial stewardship duty (to preserve the assets of the trust);
(ii) a management stewardship duty (to manage the property with care), and
(iii) a duty of undivided loyalty (prohibiting a trustee from taking advantage of his or her position without fully informed consent of beneficiaries).
What is interesting from the perspective of an estates litigator is the Court’s observation that, “historically, the remedies for such breaches took the form of orders made after a process of accounting. The basis of the accounting would reflect the nature of the obligation. The operation of the process involved the court having a power, where appropriate, to “falsify” and to “surcharge.”
Falsification is another word for “disallow”; the Court will “falsify” the unauthorized breach of the custodial stewardship duty and require the trustee to make good the loss to the trust.
Although the terms are less commonly referenced in modern practice, surcharge and falsification are great examples of how courts provide remedies for breach of trust in the context of a contested passing of accounts.
Thanks for reading.
I blogged earlier this week about the availability for a trustee to bring an Application for the opinion, advice and direction of the court under section 60(1) of the Trustee Act, and, in so doing, potentially alleviate themselves from liability concerning the decision so long as they act in accordance with the court’s direction. But what should happen if, when confronted with a difficult decision, the trustee does not ask the court for direction, but rather should act of their own volition? If a beneficiary should later successfully argue that the trustee acted improperly in making such a decision, and committed a breach of trust, will the trustee always be liable for such a decision?
The Trustee Act is clear that just because a trustee commits a technical breach of trust, it does not necessarily follow that the trustee will be held liable for any corresponding damages. Section 35(1) of the Trustee Act provides:
“If in any proceeding affecting a trustee or trust property it appears to the court that a trustee, or that any person who may be held to be fiduciarily responsible as a trustee, is or may be personally liable for any breach of trust whenever the transaction alleged or found to be a breach of trust occurred, but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust, and for omitting to obtain the directions of the court in the matter in which the trustee committed the breach, the court may relieve the trustee either wholly or partly from personal liability for the same.” [emphasis added]
As is made clear by section 35(1) of the Trustee Act, so long as the trustee acted “honestly and reasonably” in committing the breach of trust, the court may in its discretion relieve the trustee from liability concerning such a decision. The leading authority regarding what is to be considered “honestly and reasonably” is the British decision of Cocks v. Chapman,  2 Ch. 763, at 777, where the court states:
“It is very easy to be wise after the event; but in order to exercise a fair judgment with regard to the conduct of trustees at a particular time, we must place ourselves in the position they occupied at that time, and determine for ourselves what, having regard to the opinion prevalent at that time, would have been considered the prudent course for them to have adopted.” [emphasis added]
If the court is of the opinion that the opinion prevalent at the time would have considered the decision prudent, it may alleviate the trustee fr
om liability concerning such a decision in accordance with section 35(1) of the Trustee Act. If not, the trustee may continue to be liable for the decision.
Thank you for reading.
Dr. Donovan Waters, Q.C., recently published an insightful article, “Estate Planning When Authorising Trust Terms are Absent” (2016) 35(3) ETPJ 251, that examines whether it is a breach of trust to carry out an estate freeze that excludes or adds new beneficiaries.
An estate freeze fixes the value of a current trust (“Trust A”) and transfers the future growth to another trust (“Trust B”). Dr. Waters looks at whether Trust B can have different beneficiaries than Trust A. There are various reasons why trustees may want to change the beneficiaries of a trust – such as cross-border tax implications for Canadian citizens living in the US, a divorce or new marriage, to name a few.
However, given the nature of the fiduciary relationship between trustees and beneficiaries and given that a trustee is obligated to discharge the duties set out in the trust instrument, Dr. Waters is of the opinion that it is a breach of trust for trustees to exclude or add to existing beneficiaries by way of an estate freeze, unless authorised by the terms of the trust instrument. Trustees owe a duty to serve the best interests of the beneficiaries, and excluding a beneficiary from Trust B is antithetical to that beneficiary’s best interests.
Assuming authorising terms must be present in the trust instrument in order for trustees to perform an estate freeze, Dr. Waters’ asks what kind of language is sufficient to empower an estate freeze. He is of the opinion that the trust instrument must expressly (and not generally) authorise a freeze.
Assuming that Trust A is already in existence and provides no authorisation to vary or to carry out an estate freeze, Dr. Water’s is uncertain whether a court would grant a freeze, even if the relevant variation of trusts legislation provides the court with the jurisdiction to vary. While Canadian courts have taken a positive approach and facilitated variations when the variation is sought for the benefit of the beneficiaries, there is no benefit to the beneficiaries of Trust A who are excluded from Trust B. As such, for the beneficiaries of Trust A who are excluded, a court would likely require significantly more “benefit” than is granted by the variation sought by the trustees of Trust A.
Finally, Dr. Waters’ offers helpful advice for drafting new trusts that expressly authorise trustees to perform an estate freeze.
As the world continues to “shrink” as a result of globalization and as Canadian beneficiaries may be more likely than in past decades to take up domicile in another country, drafting solicitors should consult with their clients about what powers to grant to their trustees to adapt to a changing world.
Thank you for reading.
Families with young children are encouraged to start saving for their education as early as possible. The RESP is one of the most popular methods used to accomplish this; however, it is not uncommon for it to become the subject of disputes if the parents later separate or divorce. One of the issues that arose this past year specifically looked at the possibility of a spouse removing the other as co-holder of an RESP that was created for the benefit of their mutual children. By categorizing the RESP as a trust, the court held that in certain circumstances, removal was a possibility.
In McConnell v McConnell (2015 ONSC 2243, CarswellOnt 4939), the court looked at the nature of the RESP. It determined that it is essentially a trust fund held by a trustee on behalf of the children, who are the beneficiaries. Furthermore, as long as the three certainties are met, there is no real need for an express declaration of trust.
By determining that the RESP is a trust, the removal of a spouse as co-holder can be looked at through the lens of trust law. The court concluded that trustees of an RESP must be able to act unanimously. If the trustees cannot cooperate to the detriment of the beneficiaries, then removal of a trustee may be appropriate.
Removal of a spouse as co-holder of an RESP is not a novel concept. However, the categorization of the RESP as a trust now allows the courts to do so through established recourses traditionally available for the removal of trustees. The parent account holder as a trustee may be held to higher standards of accountability as a fiduciary. As such, for those seeking to have a co-trustee removed, remedies for breach of fiduciary duties may be available.
Thank you for reading.
Billionaire and recently deceased American shopping mall developer Melvin Simon’s heirs are fighting over his last will. Mr. Simon’s children from his first marriage are challenging a will that changed the distribution of his estate in favour of his second wife. Aside from the glamour factor, the case is interesting in that an allegation of fraud was recently dismissed on the grounds that "[t]he complaints fail to allege affirmative misrepresentations that can support a claim of actual fraud".
This illustrates an important point in estate and trust litigation. Ontario’s Rules of Civil Procedure similarly requires pleadings that contain allegations of fraud or breach of trust to contain full particulars:
"Rule 25.06(8) Where fraud, misrepresentation, breach of trust, malice or intent is alleged, the pleading shall contain full particulars, but knowledge may be alleged as a fact without pleading the circumstances from which it is to be inferred."
This could theoretically present beneficiaries challenging the actions of a trustee, since the trustee frequently has the particulars and the beneficiaries do not. In practice, this problem rarely arises because most litigation occurs in the context of a passing of accounts, where it is unnecessary to make allegations against the estate trustee. Instead, under the procedure in Rule 74, the beneficiaries can simply file and serve a Notice of Objection to Accounts challenging transactions or omissions in the trustee’s accounts.
After filing their Notice of Objection to Accounts, the beneficiaries can then bring a motion for an order giving directions (or an order for assistance) that will provide for the disclosure of the particulars they think exist. After receiving full disclosure, the beneficiaries should in a position to make a better-informed decision on whether to add such allegations to their pleadings.
Where this process is anticipated, the order should specifically authorize the parties to return to court for further directions. Of course, it would rarely even be necessary to allege fraud at all, since the facts that support the allegation of fraud can form the basis of an objection to the accounts without using the words "fraud" or "breach of trust", and this can achieve the same practical result without the risks associated with alleging fraud. Beneficiaries can also avoid the risk of having their pleadings struck at an early stage.
Have a great day,
Christopher M.B. Graham – Click here to learn more about Chris Graham.
The Trustee Act can be a responding solicitor’s best friend. Consider section 35, which excuses trustees for technical breaches of trust where the elements are met:
"35. (1) If in any proceeding affecting a trustee or trust property it appears to the court that a trustee, or that any person who may be held to be fiduciarily responsible as a trustee, is or may be personally liable for any breach of trust whenever the transaction alleged or found to be a breach of trust occurred, but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust, and for omitting to obtain the directions of the court in the matter in which the trustee committed the breach, the court may relieve the trustee either wholly or partly from personal liability for the same."
This helpful section can eliminate Gotcha! claims and provides a ready response to frivolous accusations that often arise in the course of litigation. By eliminating nuisance claims for minor breaches, section 35 gives solicitors acting for trustees a very quick answer to the minor types of claims that add little substance to already complex litigation.
However, this provision does not apply to liability for a loss to the trust arising from the investment of trust property (Trustee Act, s.35(2)).
Have a great week, and remember, it’s really Wednesday.