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Litigation, Succession

Liquidators and Trustees beware: the noos is tightening!

Dec 8th, 2016

By Barry Landy

In a previous blog post, I reported on the case of Bell v. Molson, a 2015 decision of the Quebec Court of Appeal. Briefly, the facts were that Appellants’ paternal grand-father had created a trust in a will in 1937 that was administered by Respondent trustees until 2004.

For many years, David Y., the grandson, was beneficiary of the trust and a trustee, along with his brother George and The Royal Trust. After David Y. died, his children sued the trustees (including the estate of their late father) for a final accounting alleging that as a result of their faulty administration, the trust had lost several million dollars.

In first instance, that is what the Superior Court found, holding the trustees liable to reimburse the estate $665,000. However, by way of cross-appeal, the trustees claimed reimbursement of their defence costs of $3.2 million, and the Superior Court also held that they were entitled to be reimbursed these expenses, because they were related to their administration of the trust assets.

The issue of fault turned around whether the trustees had followed an inadequate investment policy and in particular had failed to sell the trust’s holdings in IBM, GE and Nortel in early 2000, leading to an eventual substantial capital loss, despite warnings by one of the trustees, the Royal Trust, to both David Y and his brother George that the estate was “over-weighted” in those stocks.

Despite a clause in the will exonerating the trustees from liability from losses arising as a result of following a particular investment policy, the Court of Appeal decided that this did not protect the trustees from liability for bad investment decisions essentially because trustees have obligations to manage with prudence and diligence as a matter of public order, in the best interest of the beneficiaries.

For their part, the trustees pleaded, amongst other things, that over a 60 year time-span, they had acted reasonably and prudently in the circumstances, which argument the court rejected. Their position was that expenses of administering an estate, including the costs of rendering accounts, are borne by the beneficiary, or the trust patrimony, and that this included the right to be reimbursed for their legal expenses incurred in defending their administration of the trust assets, because even if the court found they had committed a fault, they did not act in bad faith or in an abusive manner.

The Court of Appeal reversed the trial judge on this issue, holding that where liquidators and trustees accept the duty to act, even gratuitously, if they cause damages to the estate as a result of their administration, they have to indemnify and hold the estate harmless and are not entitled to be reimbursed their legal expenses incurred to defend themselves.

The Court of Appeal referred to the following test: Legal expenses of a trustee are legitimate “administrative expenses” chargeable to the estate if they are objectively incurred in the interest of the beneficiary or to realize the purpose or goal of the administration.

According to the Court of Appeal, where the trustees were defending their administrative decisions, they were acting in their own interest, to avoid their own liability. Accordingly, they were responsible to pay their own legal fees, especially because they were eventually found to have committed a fault during their administration.

In Ontario, the rules are similar: Trustees are entitled to be reimbursed for reasonably incurred legal costs. However, the recent decision of the Ontario Court of Appeal in Brown v. Rigsby (2016 ONCA 521) seems to add an additional test, namely that the conduct of an estate trustee seeking  reimbursement of legal expenses is also dependent upon the reasonableness of the conduct of the trustees. While this case is not authoritative for Quebec law purposes, it is striking that the position in Ontario now seems to be very similar to the Quebec position, namely that where a trustee acts unreasonably or for his own interest, he is not entitled to indemnification for legal fees incurred in defending himself against breaches of fiduciary duties. Furthermore, even where the trustee is entitled to reimbursement, he is not necessarily entitled to full reimbursement. He can only be reimbursed for what a court believes is an appropriate amount.

As I reported in an earlier blog, it appears that the risk of acting as a trustee or administrator of the affairs of another (whether or not this is in the context of an estate) is now a very risky proposition. Even where trustees purport to follow what they consider to be a prudent investment policy, their administration can be subjected to an ex post facto analysis. And as the saying goes, “Hindsight is 20/20”. Imagine you administer an estate and the time comes to render your final account. You are sued for having been negligent during your administration (which may span many, many years). How do you defend yourself? Do you hire experts to opine regarding the prudent nature of your administration? Do you hire lawyers to defend your conduct? Who pays the expenses? Suppose after 10 years of litigation (for which you have paid the costs) you win? Are you then entitled to reimbursement? Will the estate have the means to reimburse you at that time?

We think that the full effects of decisions such as Bell and Brown have yet to reverberate through Quebec society and that the risk of having to support litigation fees and costs to demonstrate that one has acted prudently is an unreasonable burden to ask trustees to assume. For the moment, extreme caution remains the watchword.