STEP - Liability of Estate Trustees

Transcription

1 STEP - Liability of Estate Trustees Maurice Cullity January 9, 2013 We were asked to comment on six fairly recent decisions in which, for the main part, the liability of estate trustees - and the limits of their rights of indemnity and reimbursement out of estate funds have been in question. The connection between liability and rights to reimbursement or indemnity is that trustees will usually be personally liable for expenditures that were not properly payable out of the estate. The questions are important for lawyers retained by estate trustees not merely because the answers may affect their ability to recover their fees but also because they will frequently be asked to advise whether the trustee may pay them out of the assets of the estate. In some situations the general principle that the right of the estate trustees to claim an indemnity or reimbursement for expenses reasonably and properly incurred in the administration of the estate may provide sufficient guidance. In many other cases that will only be the beginning of an inquiry into the reasonableness and propriety of the legal services obtained. In these cases to say that the answer depends on the facts may be correct but obviously, by itself, not helpful. It should not be permitted to avoid or obscure the search for principles applicable to different fact situations. The cases also touch on issues of timing affecting the rights of reimbursement and indemnity, the legal costs of beneficiaries involved in estate litigation and the potential liability of legal advisers - but the emphasis is on the position of estate trustees who have incurred legal expenses and wish to have these paid out of the estate they are administering. 1

2 The complexity of the subject is affected by the necessity to make numerous distinctions. Trustees may seek the services of lawyers for a variety of different kinds of work and the nature of the work and the circumstances in which it has been requested can affect the potential personal liability of the trustees and the limits on their ability to have their expenditures paid out of the estate. Legal services may involve: (1) preliminary work on the estate including expenses of probate, and collecting and transferring assets to trustees. (2) expenses of legal advice on questions of interpretation may arise at the outset of the estate administration or subsequently during the course of administering the estate or testamentary trusts. (3) interpretation questions may concern the respective rights of beneficiaries and the correlative obligations of trustees and from time to time there may be issues concerning the application of the general law governing the conduct of trustees. (4) the more difficult cases often involve litigation expenses and here any consideration of rights and potential personal liability of trustees may require distinctions between applications for advice and directions, contested claims by or against the estate such as dependants' support and FLA applications, or challenges to the propriety of the trustee's conduct including pretaking compensation, the reasonableness of compensation or expenses and the authority of the trustees to pay expenses without the prior approval of the court or the beneficiaries. (5) in the context of litigation, there is also, of course, the necessity to distinguish cases in which it is likely that the trustees will receive a full indemnity, a substantial indemnity or a partial indemnity for their legal costs or no costs even if they have been successful. 2

3 The six cases we were asked to comment on are; 1. Zucker v. Zucker Estate (February 2, 2011, Grace J.); [2011] O.J. No (Greer J.); [2012] O.J. No (Lofchik J.); 2. DeLorenzo v. Beresh, [2010] O.J. No (Lofchik J.); 3. Craven v. Osidacz, [2010] O.J. No (Lofchik J.); 4. Bott v. Macaulay, [2005] O.J. No (Cullity J.); 5. Re Vincent Estate, [2011] O.J. No (Corrick J.); [2012] O.J. No. 865 (Div. Ct.); 6. Polionato Grandchildren s Trust v. Browne, [2009] O.J. No. 10 (Pattillo J.). To these I have taken the liberty of adding: 7. Chabros v. Anderson, [2012] A.J. No. 859 (Q.B.); and 8. Coppel v. Coppel Estate, [2001] O.J. No (S.C.J.). THE CASES Chabros v. Anderson, [2012] A.J. No. 859 (Q.B. Clark J.) -- Parties sought cost of trial of issues of execs compensation, reasoanableness of legal expenses and the ownership of a joint account. -- Execs had claimed compensation of $2.9 million and were awarded $810, Execs requested reimbursement of legal fees in excess of $605, Fees of $50,000 awarded. Objecting beneficiary got costs out of estate on a solicitor/client basis. 3

4 -- Principles applied : 1. As the starting point and the governing principle must be that executors and trustees are entitled to be indemnified for their expenses reasonably and properly incurred in the administration of the estate, the correct focus should not be on the factors that govern the exercise of the court's discretion in [rule 57.01]. 2. Legal costs incurred on a passing of accounts - including issues of executor's compensation - can be expenses reasonably and properly incurred in the administration of the estate. 3. Although the executors were entitled to have their lawyers' bills assessed, the result of the assessment would not address the question whether the assessed amount can properly be paid out of the estate. 4. Here the exorbitant request for compensation and the polarised position adopted by the executors resulted in protracted proceedings that might have been avoided. 5. Accordingly the legal costs incurred in pursuing the protracted litigation in an unsuccessful attempt to obtain an unrealistic amount of compensation were not legal fees reasonably and properly incurred in the administration of the estate. 6. The conduct of the executors did not warrant awarding the objecting beneficiary costs against them personally but such costs were properly payable out of the estate given that the objections taken by the beneficiary increased the value of the estate distributable among all of the beneficiaries. No reference made to the possibility of providing the beneficiary with a full indemnity out of the estate. 7. Estates in Alberta will no longer be treated as dripping roasts Bott v. Macaulay, [2005] O.J. No (Cullity J.) A lawyer who had performed work that he said was executors' work claimed a right to be compensated on a passing of accounts on the same basis as if he was the estate trustee. He denied that the estate trustee was entitled to have the lawyer's account assessed under the Solicitors Act. It was held that: -- the estate trustee and not the estate was the client of the lawyer and, as such, the estate trustee was entitled to have the legal accounts assessed; -- it did not follow that the estate trustee would be entitled to have the amount assessed paid out of the estate; -- in the absence of an agreement with the beneficiaries, or an agreement by the estate trustee to share compensation with the lawyer, a solicitor who performs executors' work is not thereby entitled to compensation on a passing of accounts as if he was an estate trustee. Absent any such agreement, the lawyer's services will be remunerated on the usual quantum meruit basis. 4

5 Coppel v. Coppel Estate, [2001] O.J. No (Quinn J.) Estate trustee used estate funds to pay legal expenses of an action against him for negligence in administering the estate. When the right to do this was challenged by a beneficiary, the lawyers claimed that their client was the estate. Held: the estate trustee must reimburse the estate with interest. Substantial indemnity for costs of the motion payable by the trustee personally. -- to pay the lawyers' fees out of the estate was at least as wrong as an estate trustee pretaking compensation; -- (obiter) it is similarly impermissible for non-litigation, but estate-related, accounts to be paid without prior court approval or the consent of the beneficiaries Craven v. Osidacz Estate, [2010] O.J. No (Lofchik J.) Estate trustee used estate funds to pay legal expenses of defending claims against the estate, including claims for wrongful death of son, assault by the deceased and dependants support. The estate trustee and his mother were the only beneficiaries. They alleged to have approved the payment of fees. Claimant the surviving spouse of the deceased and not a beneficiary under the will. Held: the applicant as a person financially interested in the estate had standing to object to the payment of trustee's legal expenses from the estate. : although an executor is obliged to defend claims against an estate, the fact that the executor is also a beneficiary may cast "a different light" on that duty. {Quote below from Geffen v. Goodman distinguished on this ground?] : inequitable to allow estate trustee who is also a beneficiary to have unrestricted access to estate funds while the claimant had no similar rights. : liability of estate trustee to pay legal fees not dependent on existence or non-existence of right to indemnity or reimbursement from the estate. : estate trustee injoined from paying further legal accounts with estate funds without the approval of the court or the consent of the beneficiaries and the claimant "either before or after such expenditures are incurred". : issue of accounts already paid out of estate funds adjourned to a passing of accounts. [Compare Geffen v. Goodman Estate, [1991] 2 S.C.R. 353, at : The Courts have long held that trustees are entitled to be indemnified for all costs including legal costs which they have reasonably incurred. Reasonable expenses 5

6 include the costs of an action reasonably defended... Insofar as such person [trustee] does not recover his costs from any other person, he is entitled to take these costs out of a fund held by him unless the court orders otherwise; and a court can otherwise order only on the ground that he has acted unreasonably or in substance for his benefit, rather than for the benefit of the fund. (italics added)] DeLorenzo v, Beresh, [2010] O.J. No (Lofchik J.) Testator died Will created testamentary trusts for grandchildren with ultimate distribution postponed until age 30. One beneficiary had attained the age of 30. Estate trustee's application to pass accounts and the grandchildren's application to remove the trustee pending. Grandchildren challenging the right of the trustee to pay the legal expenses of the proceedings out of the trust fund and to withhold distribution to the beneficiary whose interest had vested until the accounts were passed and the litigation ended. Held: 1. Bott followed re estate trustee and not the estate being the lawyer's client and the lack of correlation between the amount of the estate trustee's liability to pay lawyers and the amount that the trustee could recover from the estate. 2. Where the propriety of the trustee's conduct in administering the estate was in issue, the general rule that the trustee is entitled to full indemnity for expenses of administration properly incurred doesn't apply. 3. Instead, each party should bear their own costs until the end of litigation. Although Craven not cited in the reasons the court made the point that it would be inequitable to permit the trustee to have access to funds of the trusts while the objecting beneficiaries had to finance the litigation from their own resources. 4. Trustee ordered to reimburse the trust funds for amounts used to pay legal fees with post-judgment interest from the dates the amounts were withdrawn. No distinction drawn between expenses of the passing of accounts and those of the application to remove the trustee. 5. Estate trustee injoined from using trust funds to pay further legal fees without the consent of the beneficiaries or further order of the court. 6. Obiter statement in Coppel re non-litigation expenses quoted and neither expressly approved or disapproved with the court stating only that such costs and expenses are normally awarded at the time of the passing of accounts per cent of the beneficiary's share ordered to be distributed with the balance held back to satisfy the estate's trustee's lien for compensation and expenses reasonably incurred. 6

7 Poloniato Grandchildren s Trust v. Browne, [2009] O.J. No. 10 (Pattillo J. Costs of estate trustee s application for advice and directions re interpretation of a will as varied twice. Two days hearing extensive documentary productions cross examinations. The days of trusts or estates being bank machines for litigation costs are over. (para 47) Costs of $1,679,000 in the aggregate awarded to estate trustee, Children's Lawyer and beneficiaries represented at the hearing. All costs awarded on the basis of a full indemnity. Matters relevant to entitlement and quantum: Trustee awarded $917,215 including $801,291 for fees. - The ordinary costs rules in civil proceedings apply except where the litigation was caused by the actions of the testator or residuary beneficiaries or was reasonably necessary to ensure the proper administration of an estate where the basis for the dispute was reasonable. - Principle of indemnification in Geffen v. Goodman Estate applies unless the application was unnecessary or where it was made necessary by the unreasonable position of one of the parties. - Here the application was neither unnecessary or ill-advised. - Though the terms of the trust were clear and unequivocal, the issue was complex and not straightforward. - Trustees have a duty to seek the court's advice whenever they are in doubt on the construction, scope of their duties or powers or any other legal questions. - The trustee took a neutral position on the application. - On quantum extensive documentary productions were required of the trustee and the trustees coordinated a joint document brief and a joint brief of authorities. - When trustees properly come before the court they are entitled to "the fullest possible protection" and here a full indemnity for their costs was appropriate. - Trustee's costs allocated one-third to income and two thirds to capital as unfair to allocate all to the capital. All beneficiaries had benefited from the proceeding and the income beneficiaries, it seems, were considered to be partly responsible for the issue of interpretation. Children's Lawyer awarded $367,695 including $322,192 for fees. - Children's Lawyer did not taken unduly aggressive or combative position. No egregious conduct. 7

8 - No consideration of alternatives to a full indemnity. Income beneficiaries claimed $712,135 for four sets of counsel. - Awarded one set of costs of $375,000 "on a full indemnity basis" and this allocated between the represented beneficiaries. - Again no consideration of alternatives to a full indemnity. Lawyer/witness expenses of $19,293 to be paid out of the income and capital of the trust in the proportions of one third and two-thirds. - Although the expenses related to the preparation and examination of a lawyer as a witness, they were properly payable from the income and capital of the trust as he was examined in respect of his professional legal work on one of the variations. He was entitled to charge his normal hourly rate in effect a full indemnity Re Vincent Estate, [2011] O.J. No (Corrick J.); [2012] O.J. No. 865 (Div. Ct.) Beneficiary challenging right of trustee during litigation to pay legal fees out of estate. Beneficiary argued reasonableness of the fees should be determined on an assessment. Judge at first instance held that beneficiary estopped from objecting to trustees right to reimbursement of fees paid before a previous consent order that the trustee was entitled to "reimbursement of legal costs and disbursements, other properly incurred charges and reasonable out-of-pocket expenses". Beneficiary held entitled to have fees paid after the consent order referred for an assessment. Decision on estoppel reversed on beneficiary's appeal on the ground that he had not been given a fair opportunity to address the issue. Beneficiary awarded costs of the appeal on a partial indemnity basis. Trustee s costs of the appeal and whether entitled to have them paid from the estate left for further submissions. Beneficiary appears to have accepted that trustee entitled to be reimbursed for full amount of the fees as assessed. No distinction drawn between the rights of the trustee and the lawyers inter se and the right of the trustee to obtain reimbursement from the estate. Nothing in the facts as set out in the reasons of either court to indicate that the distinction could be important Re Zucker Estate; Zucker v. Zucker Estate, (Grace J., February 2, 2011); [2011] O.J. No (Greer J.); [2012] O.J. No (Lofchik J.). -- multiple issues but only a few resolved prior to settlement. Others had been set down for trial. 8

9 -- Main issues pretaking compensation and right of estate trustee to be indemnified or reimbursed for legal expenses of the litigation. -- pre-eminently a case illustrating the potentially serious consequences for a trustee who acts without legal knowledge or advice. Facts: testator died December, $42 million estate; three children beneficiaries; estate trustees a friend/member of accounting firm and one of his partners. The friend was elderly and administration of the estate was increasingly performed by the other trustee. In the eight years following the death of the testator, $33 million was distributed to the beneficiaries and most of the remainder expended on executors' compensation pretaken, income tax, settlement of claims against the estate, legal and accounting expenses and charitable gifts or bequests. The executors' compensation of approximately $2.9 million had been divided between the two estate trustees and their firm. The active trustee appears to have delivered the estate accounts three times in the eight-year period and these indicated amounts of compensation pre-taken without explanation of the basis on which they had been calculated. Active trustee met with beneficiaries twice in the period but the evidence was conflicting on the extent to which the compensation had been discussed and whether the beneficiaries had provided their informed consent. They alleged that they had never been informed of the basis on which compensation had been calculated. Nothing in the will authorised pretaking. In 2010, or early 2011, the beneficiaries moved for a passing of accounts, the return of all compensation pretaken with interest and the prohibition of taking further compensation or reimbursement of legal fees until further order of the court. February, question of pretaking considered by Justice Grace. Held: that despite cases cited to the contrary - and while pretaking was prima facie unlawful if not authorised in a will - there were two exceptions that permitted pretaking on an interim basis while the administration of the estate was continuing or where the consent of the beneficiaries or the approval of the court had been obtained. Dicta of Misener J. in Re King followed although described as not in accord with the weight of authority. The trustees here entitled to pretake interim compensation provided and the amounts were reasonable and their accounts were passed expeditiously. Reasonableness to be determined on the passing of accounts. In order to provide security for amounts they might be ordered to repay, the estate trustees and the firm were ordered to sign personal undertakings to pay any amount subsequently ordered to be repaid and to provide letter of credit for $500,000 for the same purpose. Among numerous other motions a motion to remove the active trustee was granted by Greer J. who referred to the fact that no letter of credit had been posted, that the active trustee was impecunious, had been dismissed by his firm, had allegedly made a fraudulent conveyance of his residential property, was 9

10 involved in a wrongful dismissal action against the firm and was receiving psychiatric attention. The facts were said to cry out for his removal. Justice Greer also ordered that no legal fees incurred by the active trustee could be paid out of the estate pending the passing of the accounts but declined to order the law firm to repay fees already satisfied out of the assets of the estate. She noted that that the cases on the entitlement to pay legal fees from an estate without approval or consent - including Coppel - were conflicting. Finally, on a further motion for directions, Lofchik J. set down the issues to be tried on a passing of accounts including: - the reasonableness of the amount of compensation pretaken and whether, even if unreasonable, it was permissible to take it on an interim basis; and - a possible defence of limitations to the beneficiaries' claim for repayment of compensation pretaken. In addition, the accounting firm was added as a party for the purpose of an adjudication of its liability to repay the share of compensation it had received and the passive trustee's claim to be indemnified by the firm. The liability of the law firm to repay fees it had received was, it seems, left in limbo Issues Arising Out of the Cases 1. Estate trustee and not estate as lawyer's client - importance of the distinction - reasonableness of fees as between lawyer and trustee does not mean that that they are reasonable as between the trustee and the estate or its beneficiaries; - availability and scope of assessment under Solicitors Act. (Bott; Coppel; Chabros; DeLorenzo; Craven; Vincent). 2. Compensation - pretaking; - meaning and required time of informed consent; - lawyer doing executor's work; - splitting compensation with a third party. (Bott; Zucker) 3. Payment of legal expenses out of estate prior to court approval - general principle; - relevance, if any, of section 23.1 of Trustee Act 10

11 - is, or should, the issue be distinguishable from claims to pretake compensation? - distinctions between legal expenses of: -- advice and directions re interpretation of will -- advice and directions re scope of trustee's powers and duties; -- claims against the estate; -- challenge to propriety of trustee s conduct; (Coppel; Craven; DeLorenzo; Zucker; Chambros;Poloniato). 4. Costs - scale; - full indemnity for costs of all parties and of non-party lawyer/witness. witness; - separate representation of different beneficiaries; - relevance of rule factors; - neither a dripping roast nor an ATM machine. (Chabros; Poloniato; Vincent; Coppel). 5. Trusteeship is an onerous responsibility - potential impact on trustee; - potential impact on lawyer. (Zucker)