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Liability for the actions of a Co-executor?

A case review of Cahill v. Cahill

Can one executor be held liable for the actions of a co-executor? This is the question put to the court in Cahill v. Cahill.1

The father made a will appointing a son and daughter as executors and trustees. The will provided that they set aside $100,000 in trust for their brother Patrick with the balance of the residue to go to the grandchildren. No trust was set up. The grandchildren received nothing. The co-executor brother duped his sister and stole the money. The sister received nothing.

Patrick brought an application to remove his brother and sister as executors and to compel them to pass their accounts.   Notwithstanding that the sister was not actively involved and did not get any of the money, the trial judge found her negligent and liable for breaching her fiduciary duty.

Both on the application and on the appeal, the judges considered whether they should exercise their discretion under s. 35 of the Trustee Act to relieve the sister from liability.

Section 35 of the Trustee Act, R.S.O. 1990, c. T.23 (the “Act”)

Section 35(1)2 of the Act is the first line of defence3for a co-executor who proclaims innocence in the face of a co-executor’s wrongdoing.4 The argument is that s/he acted honestly and reasonably and that the court should use its discretion to relieve the trustee from personal liability for the improper actions of a co-executor. That argument succeeded in Villa v. Villa,5where the executor breached his fiduciary duty by commingling money from his mother’s estate with his personal monies. The accounting showed, however, that the executor could distinguish between his mother’s Estate assets and his own. In this instance s. 35 of the Act was applied. The Court excused the executor from a mere error in judgment because he acted honestly and reasonably in the exercise of his duties and was able to repay the money to the Estate. He was even entitled to compensation.6

In Cahill, the sister tried to make the same argument. She trusted her brother. She argued it was an honest mistake and was reasonable in the circumstances. The application judge rejected this argument. So did the Court of Appeal. The sister had duties as an executor and trustee. She had to take “real, active steps to ensure that the trust fund was set up in accordance with the Will. If the sister was not prepared to fulfill those duties she could have renounced at the beginning. The fact the sister received assurances from her brother that the trust fund was set up was not enough. She had a duty to make inquiries to satisfy herself that the trust fund was set up in accordance with the Will. An honest mistake is not necessarily reasonable in the context.

With respect to section 35 of the Act, the Application judge found no evidence of dishonesty. But being honest was not enough7. The court found that the sister did not act reasonably by leaving everything to her co-executor and not doing her own due diligence to ensure the terms of the Will were carried out.8

On appeal, the court expressed the view that being an executor is extremely onerous and that legislation, common law and equity impose duties on trustees making them fiduciaries. The Court of Appeal quoted several text books explaining that an executor has a responsibility to fulfill his/her duty and that does not allow one executor to just trust his/her co-executor to handle everything. The following is noteworthy from the case:

  • “whenever a trustee fails to fulfill his or her obligations with respect to the administration of the trust”, liability arises whether the breach is innocent, negligent or fraudulent. Liability “exists even if the loss would have occurred without the breach. In general, liability is imposed not to punish trustees but to restore the beneficiaries to the position they would have been in had the breach not occurred”;9
  • It is not unusual for one of several trustees to be the ‘acting trustee’, meaning the trustee who actively interests himself in the trust affairs, and whose decisions are merely endorsed by the co-trustees. The court, however, does not recognize any such distinction; for the settlor has trusted all the trustees to carry out the terms of the trust and each and every one of them must exercise his or her individual judgment and discretion on every matter, and not blindly leave any questions to a co-trustee.10
  • Not only must trustees be unanimous in the exercise of their powers, but each trustee must actively consider his or her discretion and will not be exonerated for passively acquiescing in the actions of the co-trustee.11
  • A trustee is not entitled to shrug off the wrongful actions of a co-trustee on the basis that he or she knew nothing of what the other was doing. As a fiduciary, the trustee is responsible for all acts of trusteeship, and therefore carries a several, as well as a joint, liability for all that is done in the name of the trust or through the exercise of the office of trustee.12

In its analysis of whether section 35 of the Act applied, the Court of Appeal indicated that there were three elements to be proven in order for the trustee to be excused from the breach of trust:

  1. that he or she acted honestly;
  2. that he or she acted reasonably; and
  3. that he or she ought fairly to be excused.

Both the Application Judge and the Court of Appeal found that the sister did not act reasonably. She made no inquiries and took no steps to fulfill her duties owed to the beneficiaries.

Cahill was considered in three subsequent cases. There was no divergence from the message of the Court of Appeal and the Supreme Court has not addressed the issues on appeal.13

Conclusion

As stated by Professor Freedman,14 “The trustee will be forgiven for technical breaches of his or her duty of care where the trustee acts in accordance with the traditional requirements of honesty and reasonableness.”15However, Cahill stands for the proposition that it is not reasonable for co-executors to sit back and watch other executors administer the estate. It was never meant to be used to exculpate honest people who neglected their fiduciary duty.16 Courts are going to ask whether the steps taken or not taken by the “innocent” executor were honest and reasonable in the circumstances.

What is the standard of reasonableness?17 In his article on this topic, Professor Freedman quotes the following, “the trustee . . . must administer the trust competently, and the standard of care is the traditional standard of “ordinary prudence.” [Re Stuart, [1897] 2 Ch. 583; Re Grindey, [1898] 2 Ch. 593 at 601 (C.A.); and National Trustees Co. of Australasia Ltd. v. General Finance Co. of Australasia Ltd., [1905] A.C. 373 at 381 (P.C.)] . . . [T]he trustee will be forgiven for technical breaches of his or her duty of care where the trustee acts in accordance with the traditional requirements of honesty and reasonableness.”

In Cahill, the Court of Appeal accepted that the executor in question was honest, but failure to fulfil her fiduciary duty was not “reasonable” and held her liable.

Footnotes
  1.   2016 CarswellOnt 19994, 2016 ONCA 962, (2016) O.J. No. 6569, 26 E.T.R. (4th) 207, 274 A.C.W.S. (3d) 445 (Cahill).
     
  2.   Relief of trustees committing technical breach of trust.

    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.
     

  3.   We also refer the reader to sections 17 (Power and discretion of trustee for sale) 18 (Sales by trustees not impeachable on certain grounds) and 63 (Indemnity) of the Trustee Act.
     
  4.   We refer the reader to an article written by Dale Roseberg entitled, “Under what circumstances will a court relieve a trustee from liability for a technical breach of trust under s. 35 of the Trustee Act?” which is available on Westlaw Estate Litigation, Issues in Focus, Brian A. Schnurr. His initial comment references Professor Donovan Waters and states, “in his text Law of Trusts in Canada states that there are three fundamental duties which are bestowed upon a trustee: “First, no trustee may delegate his office to others; secondly, no trustee may profit personally from his dealings with the trust property, with the beneficiaries, or as a trustee; thirdly, a trustee must act honestly and with that level of skill and prudence which would be expected of the reasonable (person) of business administering his own affairs.”
     
  5.   Villa v. Villa, 2013 CarswellOnt 5158, 2013 ONSC 2202, 227 A.C.W.S. (3d) 1199, 89 E.T.R. (3d) 49 (Villa)
     
  6.   See paragraphs 27-29 of Villa.
     
  7.   The Court of Appeal came to this conclusion in a previous 2014 decision.   See paragraph 5 & 10 in Penman (Litigation guardian of) v. Penman 2014 CarswellOnt 960, 2014 ONCA 83, 119 O.R. (3d) 128, 237 A.C.W.S. (3d) 272 where the OCA stated,

    5. The application judge’s core findings regarding the reasonableness of the appellant’s conduct are perhaps most succinctly set out at paras. 86, 87 and 102 of her reasons:While there is no suggestion of any dishonesty on her part, the evidence clearly establishes that Ms. McGillvray did not act reasonably: she failed to consider all relevant criteria in determining whether the proposed investments were appropriate; she completely delegated the exercise of her discretion to Mark Penman and to Randal Penman; and she failed to make any reasonable inquiries about the proposed investments or to follow up regarding their status.

    It is wilful neglect and default of a trustee to place trust funds in the hands of another and allow it to remain there for years without any inquiry or any assurance that the trust is being properly administered. Ms. McGillvray’s failure to make any further inquiry about the investment of the trust funds constitutes wilful neglect and default of which Ms. McGillvray would not have been guilty in the management of her own affairs.

    10. .…… court-ordered relief under s. 35(1) is available only for a trustee who has acted reasonably, as well as honestly. On the application judge’s findings, that is not this case.
     

  8.   Paragraph 37 Cahill.
     
  9.   Paragraphs 25 & 26 of Cahill where the Court of Appeal refers to The Law of Trusts, 3d ed. (Toronto: Irwin Law Inc., 2014), at pp. 154-55, Gillese J.A. describes the nature of a trustee’s role.
     
  10.   Paragraph 33 of Cahill where the Court of Appeal refers to David Hayton, Paul Matthews and Charles Mitchell in Law of Trusts and Trustees, 8th ed. (Markham: LexisNexis, 2010), at p. 839.
     
  11.   Paragraph 34 of Cahill where the Court of Appeal refers to Carmen S. Thériault, in Widdifield on Executors and Trustees, looseleaf (2016-Rel. 9), 6th ed. (Toronto: Thomson Reuters, 2016), at para. 8.7.2.
     
  12.   Paragraph 35 of Cahill where the Court of Appeal refers to Donovan W.M. Waters writes in Waters’ Law of Trusts in Canada, 4th ed. (Toronto: Carswell, 2012), at p. 43.
     
  13.   Jones v. Warbick, 2019 ONSC 88 (Ont. S.C.J.), Plese v. Herjavec, 2018 ONSC 7749 (Ont. S.C.J.); Hopgood v. Hopgood (Estate), 2018 CarswellNS 304, 2018 NSSC 100, 293 A.C.W.S. (3d) 221, 36 E.T.R. (4th) 169.
     
  14.   https://law.queensu.ca/directory/david-freedman
     
  15.   C.D. Freedman, Misfeasance, Nonfeasance, and the Self-Interested Attorney, Osgoode Hall Law Journal, 48 Osgoode Hall L.J. 457, Fall/Winter 2010 at p. 7.
     
  16.   In his article entitled, “Under what circumstances will a court relieve a trustee from liability for a technical breach of trust under s. 35 of the Trustee Act”, Dale A. Rosenberg quoted Guschewski v. Guschewski, 2017 CarswellOnt 11623 (Ont. S.C.J.), wherein Price J. noted at paragraphs 42–45:

    Dickson J., in Fales v. Canada Permanent Trust Co., (1976 CarswellBC 317 (S.C.C.), 2 S.C.R. 302), sets out the standards for a trustee in general terms as follows: (“)Traditionally, the standard of care and diligence required of a trustee in administering a trust is that of a man of ordinary prudence in managing his own affairs (Learoyd v. Whiteley (1887), 12 App.Cas. 727; Underhill’s Law of Trusts and Trustees, 12th ed., art. 49; Restatement of the Law on Trusts, 2nd ed., para. 174) and traditionally the standard has applied equally to professional and non-professional trustees. The standard has been of general application and objective though, at times, rigorous(”)…In Philip H. Pettit, Equity and the Law of Trusts, 6th ed. (Wellington, N.Z.: Butterworths, 1989) at p. 47: (“)The provisions of the section, it has been said, were intended to enable the court to excuse breaches of trust where the circumstances of the particular case showed reasonable conduct, that was never meant to be used as a sort of general indemnity clause for honest men who neglect their duty(”)…There is an onus on the trustees to show he acted honestly and reasonably.
     

  17.   We refer the reader to paragraph 49 of the SCC decision in Fales v. Canada Permanent Trust Co., 1976 CarswellBC 240, 1976 CarswellBC 317, (1976) 6 W.W.R. 10, (1976) S.C.J. No. 72, (1977) 2 S.C.R. 302, 11 N.R. 487, 70 D.L.R. (3d) 257.Most Recent Distinguished: Krenbrink Estate v. R, | 2014 TCC 22, 2014 CCI 22, 2014 CarswellNat 131, 2014 CarswellNat 674, 2014 D.T.C. 1065 (Eng.), 237 A.C.W.S. (3d) 1066, (2014) 4 C.T.C. 2213 | (T.C.C. (General Procedure), Jan 27, 2014).

    In this case the wife of the deceased was a co-trustee. The Trustee who essentially made the investment decisions failed to dispose of speculative shares in a timely fashion with the result being a huge loss to the estate. Was the wife liable? The SCC used British Columbia’s version of s. 35 of the Act to excuse the wife from the breach:

    “49     Section 98 is remedial legislation, giving statutory recognition to the fact that the standard of conduct which courts have expected of trustees has been, at times and in certain circumstances, unduly harsh and inflexible: see “The Trustee’s Duty of Skill and Care” (1973), 37 The Conveyancer and Property Lawyer (N.S.) 48. Section 98 permits the court or a judge to relieve a trustee from personal liability for breach of trust if the trustee has acted honestly and reasonably and ought fairly to be excused. Mrs. Wohlleben acted honestly. After careful reading of the evidence and examination of the exhibits, I have concluded that she also acted reasonably. Her acts were not greatly less nor more than might be expected of one in her position. At the death of her husband, she was a housewife with four young children. She had been a school teacher and she had taken a three months’ night school course on “How to Invest your Money”. That would seem to have been the extent of her business exposure. She was no doubt an intelligent young woman of independent mind who from time to time consulted a broker and the lawyer for the estate, but her investment experience was minimal and she was without experience in the administration of trust estates. She tried to the best of her ability to keep herself informed but Canada Permanent failed to make known to her the contents of papers which were essential to informed opinion. She tried to respond but from less than complete information. She made all decisions which she was asked to make within the limits of her experience and knowledge, and I cannot find that at any time she failed to listen to reason or that she responded irrationally or obdurately. In short, it would seem to me that this is the very sort of case for which s. 98 of The Trustee Act was intended and that Mrs. Wohlleben ought fairly to be excused for her breach of trust.” (emphasis added)
     

Gregory Sidlofsky, David Wagner and Charles Wagner

The authors of this blog are Gregory Sidlofsky, David Wagner and Charles Wagner. Gregory is a Certified Specialist in Litigation by The Law Society of Upper Canada and partner at Wagner Sidlofsky LLP. David is a member of the firm’s Estate and Commercial Litigation Groups. Charles is a Certified Specialist in Estates and Trusts and partner at Wagner Sidlofsky LLP.

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This blog is not intended to serve as a comprehensive treatment of the topic. It is not meant to be legal advice. Every case turns on its specific facts and it would be a mistake for the reader of this blog to conclude how it might impact on the reader’s case. Nothing replaces retaining a qualified, competent lawyer, well versed in this niche area of practice and getting some good legal advice.
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