Do Conflicts of Interest warrant removal of an Executor?

A conflict of interest does not automatically result in the removal of an executor. A review of the case law and secondary authorities paints a coherent picture and legal baseline. For an Ontario judge to remove an executor because of a conflict of interest s/he must be convinced that the removal is in the best interests of the estate¹. If the conflict of interest has the potential to negatively impact on the best interests of the estate then there may be grounds for that executor to be removed. The higher the negative impact the more likely litigation to remove that executor will be successful.²

The propinquity inherent in these types of relationships can sometimes create conflicts of interests, which Justice Myers has described as being “insidious”.³ Such conflicts of interest may make it impossible to trust that the executor will discharge his/her responsibilities diligently and will require removal.

The case law is filled with a myriad of examples of disqualifying conflicts of interests ranging in claims for reimbursement for personal expenses to self-dealing of estate assets. Regardless of the amount in issue, where the executor’s personal interests are in conflict with their duties to act in the best interests of the beneficiaries, they may be removed and replaced with a neutral trustee.

Although the Court gives great deference to the testatrix’s choice of estate trustee⁴, the Court maintains the inherent jurisdiction to remove trustees⁵, which is confirmed by section 37 of the Trustee Act.⁶

In Radford v. Radford Estate⁷, J. W. Quinn J. thoroughly reviewed the considerations to be taken into account on an application to remove an estate trustee. These considerations are no less relevant when the issue deals with conflicts of interest. Here are some of the quotes most relevant for our discussion:

“…In deciding whether to remove an estate trustee, “the court’s main guide should be the welfare of the beneficiaries”: see Crawford v. Jardine, ibid, citing Letterstedt v. Broers (1884), (1883-84) L.R. 9 App. Cas. 371 (South Africa P.C.) at 385 -387 and Anderson, Re (1928), 35 O.W.N. 7 at 8 (Ont. H.C.).

Non-removal must likely prevent proper execution of trust

104 “It is not every mistake or neglect of duty on the part of the trustees which will lead to their removal. It must be shown by the applicant that the non-removal of the trustee will likely prevent the trust from being properly executed”: see Crawford v. Jardine, ibid.

106 “The authorities are, I believe, consistent in placing the emphasis on the future administration of the estate, and the risks to which it will be exposed if the trustee remains in office. The question is whether the trust estate is likely to be administered properly in accordance with the fiduciary duties of the trustee and with due regard to the interests and welfare of the beneficiaries. The sanction of removal is intended not to punish trustees for past misconduct but rather to protect the assets of the trust and the interests of the beneficiaries”: see St. Joseph’s Health Centre v. Dzwiekowski, supra, at para. 28

Not every allegation of a conflict of interest will warrant the removal of an estate trustee. As pointed out by professor Waters in his seminal text, many executors are also beneficiaries and they are placed in a position with discretionary powers which depending how they are exercised may incidentally benefit the executors over other beneficiaries. That type of conflict may not be enough to warrant their removal.⁸ Nonetheless the case law does acknowledge the insidiousness of conflicts of interest and how they can, “play havoc with people’s judgment of their own capacity to maintain neutrality and a fiduciary stance”.⁹ However, the onus remains on the party seeking the removal to show that removal is a clear necessity and that the welfare of the beneficiaries requires it.¹⁰

Removal of an executor because of a conflict of interest does not necessarily have to include allegations of dishonesty or misconduct. It may just be that the executor cannot faithfully fulfill his/her duty as an executor because s/he has another duty adverse in interest. That is what transpired in RE Owen Family Trust where the executor was removed because there was a conflict between his duty as trustee and his company as a debtor to the Trust.¹¹ The courts have applied the same principle and removed trustees where s/he has gone out and purchased the claim against the Estate and then taken steps to enforce the security for such claim.¹²

Executors have a duty to look at the interests of all the beneficiaries and not those of any particular beneficiary. Failure to do so may result in their removal.¹³

Conclusion

In the seminal text, Waters’ Law of Trusts, the authors begin their discussion on this topic as follows:

“It is a fundamental principle of every developed legal system that one who undertakes a task on behalf of another must act exclusively for the benefit of the other, putting his own interests completely aside. In the common law system this duty may be enforceable by way of an action by the principal upon the contract of agency, but the modes in which the rule can be breached are myriad, many of them in situations other than contract and therefore beyond the control of the law of contract. It was, in part, to meet such situations that Equity fashioned the rule that no one may allow his duty to conflict with his interest”¹⁴.

While this may be part of the thesis statement of our discussion it alone is not determinative of whether a conflict of interest warrants the removal of an executor. The case law is clear that not every conflict of interest will result in an executor’s removal. As Justice Grange stated in Lithwick , Re

“ It is, of course, not the law that an executor can never have a claim against an estate for past services or loans, but he should not place himself in a position where his duty to investigate the validity of such claim against the estate conflicts with his interest in promoting an undocumented and dubious claim.”¹⁵

But, Courts will remove executors where the existence of a conflict of interest, perceived or real, means that the executor’s continuing on in that position is not in the best interest of the beneficiaries¹⁶ When a claim that is neither frivolous nor vexatious is made against an executor that trustee cannot be expected to really investigate that claim and the courts have removed executors for that conflict.¹⁷ The key take away on when a conflict of interest justifies the removal of an executor was best states by Her Honour Justice Greer, “The main guideline in the removal of Trustees is what is in the best interests of the beneficiaries and their welfare”.¹⁸