Frye v. Frye Estate et al. [Indexed as: Frye v. Frye Estate]
91 O.R. (3d) 721
Court of Appeal for Ontario,
Simmons, Juriansz and Rouleau JJ.A.
September 9, 2008
Wills and estates -- Wills -- Trial judge erring in finding that provision in will bequeathing testator's shares in family business to his sister was null and void because it did not comply with shareholders' agreement -- Contractual obligations not constraining person's ability to bequeath property by means of will -- Section 67(2) of Business Corporations Act expressly contemplating corporate articles and shareholders' agreements that restrict transfer of shares -- Testator's executors entitled pursuant to s. 67(2) to be treated as registered owners of shares bequeathed to sister -- Business Corporations Act, R.S.O. 1990, c. B.16, s. 67(2).
Five siblings holding shares in a family company entered into a shareholders' agreement which contained restrictions on the transfer of shares. One of the siblings subsequently bequeathed his shares to his sister C. His brother J brought an action challenging the validity of that gift. The trial judge found that the testator's bequest of his shares to C was prohibited by the shareholders' agreement and, as a result, was null and void. He ordered the estate to sell the shares in accordance with the shareholders' agreement. C, who was an estate trustee of the testator and a trustee of two trusts held for the benefit of her disabled brother D, appealed in her own capacity.
Held, the appeal should be allowed.
Contractual obligations do not constrain a person's ability to bequeath property by means of a will. A breach of those obligations may give rise to an action for breach of contract but does not affect the validity of the will itself. Moreover, the trial judge did not consider the effect of s. 67(2) of the Business Corporations Act, which expressly contemplates corporate articles and shareholders' agreements that restrict the transfer of shares. Pursuant to s. 67(2), the testator's executors were entitled to be treated as the registered holders of the shares he bequeathed to C. The estate trustees were bound by the shareholders' agreement and could not distribute the shares out of the estate to C without complying with the requirements of the shareholders' agreement. Their inability to transfer the shares to C immediately did not, however, render the bequest void.
C, by taking the position that the testator's specific bequest of shares to her was valid, was not acting inconsistently with her fiduciary duties to D. As an individual, C was entitled to receive gifts, including a gift of shares from the testator, and to protect that right through recourse to the legal system. If her pursuit of her personal rights was seen to conflict with her fiduciary obligations, the appropriate course of action was for the other trustees to act or seek direction to deal with the matter. Such action did not bear any relevance to the validity of the bequest.
APPEAL from the judgment of Patterson J. of the Superior Court of Justice, dated August 2, 2006, finding that a bequest was void.
Statutes referred to Business Corporations Act, R.S.O. 1990, c. B.16, s. 67(2), (7) Succession Law Reform Act, R.S.O. 1990, c. S.26, ss. 20(2), 27
Authorities referred to Oosterhoff, A.H., Oosterhoff on Wills and Succession, 6th ed. (Toronto: Thomson Carswell, 2007) Waters, W.M., M Gillen and L. Smith, eds., Waters' Law of Trusts in Canada, 3rd ed. (Toronto: Thomson Carswell, 2005)
Myron W. Shulgan, Q.C., and Crista L. Rea, for appellant/respondent by way of cross-appeal, Cheryl Vanessa Sylvestre in her personal capacity. Harvey T. Strosberg, Q.C., and Sharon R. Strosberg, for respondent/appellant by way of cross-appeal, John Arthur Frye. Mason Greenaway, for respondent by way of appeal and cross-appeal Eldon Donald Frye, by his litigation guardian George H. Frye. Matthew Todd and James Renaud, for respondents by way of cross-appeal Cheryl Vanessa Sylvestre and Todd Burns as the Estate Trustees During Litigation of the Estate of Cameron Edward Frye, deceased.
The judgment of the court was delivered by
1JURIANSZ J.A.: -- This is another saga of siblings struggling for control of the family business after the death of their father. In the words of the trial judge, "[t]he Frye siblings . . . feuded constantly over the years, aligning with each other at various times having regard to disputes between them".
Facts
Parties
2Cheryl Vanessa Sylvestre, John Arthur Frye ("Jack"), Eldon Donald Frye ("Donny"), George H. Frye ("Bing") and Cameron Edward Frye ("Cam") are the five children of the late George H. Frye. Donny is a disabled adult. Bing, Cheryl and Cam were appointed Donny's trustees for two trusts held in his benefit. Bing acts as his litigation guardian in these proceedings. Cam passed away in April 2002, and, pursuant to Cam's Will, Cheryl and Cam's friend Todd Burns were appointed as his estate trustees.
3This case arises out of an action brought by Jack contesting the validity of a provision in Cam's Will that bequeaths his shares in the family business to Cheryl. The trial judge ruled in favour of Jack, and Cheryl appeals the judgment in her personal capacity. Both Bing and Donny, represented by Bing, were defendants to Jack's action. Donny's position at trial was based on a proposed settlement with Cheryl, which the trial judge declined to approve on the basis that the settlement would improperly provide Cheryl with benefits contrary to her fiduciary duties to Donny, both as a trustee to Donny and as estate trustee with respect to Donny's beneficial interest in Cam's Will. The trial judge's refusal to approve the proposed settlement was not questioned on appeal. Donny, represented by Bing, now opposes Cheryl's appeal and supports Jack's position as respondent, but remains opposed to Jack's intended cross-appeal of the trial judge's costs order. Cheryl and Todd Burns, as the estate trustees, have made submissions as respondents on the cross-appeal only.
The company and restrictions on the transfer of its shares
4The elder George H. Frye died in November 1991. His will divided his company, George H. Frye Holdings Ltd. (the "company"), equally among his five children -- with Donny's interest held in the two trusts mentioned above. In 1994, Bing sold all of his shares back to the company, increasing the interest held by Cam, Jack, Cheryl and Donny's trusts to 25 per cent each.
5The letters patent under which the company was incorporated in 1968 contains the following provision:
The right to transfer shares of the Company shall be restricted in that no share shall be transferred without the express sanction of the board of directors, to be signified by a resolution passed by the board of directors. . . .
6All of the Frye siblings entered into a shareholders' agreement in June 1991. At that time, their father was still alive and held shares in the company, but he was incompetent and Canada Trust had been appointed to act on his behalf. One of the agreement's purposes was to remove Canada Trust, and Canada Trust declined to sign this agreement on the elder Frye's behalf. At the end of February 1994, after the Frye siblings had inherited all of their father's shares, they signed a unanimous agreement that amended and confirmed the June 1991 shareholders' agreement. The shareholders' agreement contains the following provisions relevant to the transfer of shares:
Part I, para. 7
APPROVALS REQUIRED
The following matters, in addition to the approval required by the by-laws of the Corporation and the Business Corporations Act, shall require the approval of at least three (3) of Bing, Cam, Cheryl and Jack: . . . . . (m) Any transfer of shares otherwise as provided in this Agreement. ...
Part I, para. 11
TRANSFER RESTRICTED
Each of the Signator Shareholders agrees that he will not sell, assign, transfer, grant options in respect of or otherwise deal with any of his shares in the capital of the Corporation, except in accordance with the provisions of this Agreement. . . .
7Part I, para. 12 of the shareholders' agreement also requires that any shareholder wishing to sell his or her shares must first offer the shares to the company, and then to the other shareholders on a pro rata basis. The prospective seller is only permitted to sell to a non-shareholder after these offers have been declined.
8The siblings' shareholders' agreement lastly includes, under the heading "Family Consensus", the following declaration as to their father's intentions:
Part II, para. 1
- Bing, Cam, Cheryl and Jack acknowledge and agree that: . . . . . (b) The fixed purpose and intent of George was and is to preserve the Frye Group as a family business, and for all of his children to share equally therein. . . .
Dispute over Cam's will
9The Will, at para. 4(nn), directs the estate trustees as follows:
to transfer and deliver to my sister CHERYL VANESSA SYLVESTRE, if she outlives me, all of the shares I own at the time of my death in George H. Frye Holdings, Ltd., a Canadian Corporation.
10Jack challenged the validity of this gift through an action alleging that: Cam lacked domicile in Ontario at the time he made the Will; Cam lacked testamentary capacity at the time he made the Will; Cheryl asserted or should have been presumed to have asserted undue influence over Cam when he made his Will; the shareholders' agreement prohibited Cam from transferring his shares to Cheryl through his Will.
Trial Judge's Decision
11Jack withdrew his claim concerning domicile in Ontario at trial, and the trial judge dismissed Jack's claims concerning undue influence and lack of testamentary capacity. However, the trial judge found that Cam's bequest of his shares to Cheryl was prohibited by the shareholders' agreement, and as a result, was null and void and severable from the rest of the Will.
12The trial judge found that the meaning of the shareholders' agreement was clear and that it was unnecessary to resort to extrinsic evidence. After a careful reading of the agreement as a whole, he concluded that the words referring to the transfer of shares were broad enough to apply to a transfer by testamentary disposition. He found that Cam was bound by the provisions of the shareholders' agreement and further, that the company's letters patent required the directors to approve any transfer. He concluded that Cam therefore had no right to transfer his shares in the company to Cheryl.
13After finding the bequest void and severable from the remainder of the Will, the trial judge ordered the estate to sell the shares in accordance with the shareholders' agreement. If the trial judge's decision stands, the proceeds from this sale will fall into the estate's residue, which Cam's Will distributes equally among the surviving Frye siblings.
14The trial judge ordered that the costs of the estate solicitor should be paid on a substantial indemnity scale from the estate. Then, because the trial judge viewed the results as mixed, he ordered the other parties to bear their own costs.
Issues
15Cheryl, in her personal capacity, brings the appeal. The appeal raises the single issue of whether the trial judge erred in voiding Cam's specific bequest of his shares in the company to Cheryl.
16Jack seeks leave to cross-appeal the trial judge's costs decision, and requests that his costs of the trial be paid out of Cam's estate on a substantial indemnity basis.
Analysis
17The trial judge interpreted the share transfer restrictions in the shareholders' agreement and the company's letters patent as broad enough to apply to a transfer by testamentary disposition. The trial judge then reasoned that to give effect to Cam's contractual commitments, which also bind his estate, it was necessary to find that his specific bequest of his shares to Cheryl was null and void.
18I agree that the shareholders' agreement and the letters patent apply to a share transfer by testamentary disposition. However, it does not follow that Cam's bequest of his shares to Cheryl must be set aside.
19First, on a conceptual level, contractual obligations do not constrain a person's ability to bequeath property by means of a will. For example, a contractual obligation to make or to refrain from revoking a will gives rise to an action for breach of contract and does not affect the validity of the will itself: see A.H. Oosterhoff, Oosterhoff on Wills and Succession, 6th ed. (Toronto: Thomson Carswell, 2007), at 126-27. The trial judge concluded that "Cameron Frye was bound by the provisions of the Shareholders' Agreement as amended and had no right to transfer by his Will shares in the corporation to his sister Cheryl." Cameron Frye may have been bound by the provisions of the Shareholders' Agreement, but his right to bequeath his shares was entirely another matter.
20Second, the trial judge was not made aware of s. 67(2) of the Business Corporations Act, R.S.O. 1990, c. B.16, and did not consider its effect. Section 67(2) expressly contemplates corporate articles and shareholders' agreements that restrict the transfer of shares. It provides that a corporation shall treat "the executor, administrator, estate trustee, heir 1 or legal representative of the heirs, of the estate of a deceased security holder" "as a registered security holder entitled to exercise all the rights of the security holder that the person represents". Pursuant to s. 67(2), Cam's executors are entitled to be treated as the registered holders of the shares he bequeathed to Cheryl.
21Nor was s. 67(7) of the Business Corporations Act brought to the attention of the trial judge. As the parties did not address the import of s. 67(7), I would leave it to them to consider whether it overrides the requirement of the letters patent that a resolution of the board of directors is required to approve the registration of the transfer of shares to the estate trustees.
22In any event, there is no basis for finding the specific bequest to be null and void. Legal title to the shares is transmitted by the Will to the estate trustees, who hold them in trust for Cheryl. However, the estate trustees are bound by the shareholders' agreement and cannot distribute the shares out of the estate to Cheryl without complying with the requirements of the shareholders' agreement and the letters patent. The estate trustees' inability to transfer the shares to Cheryl immediately does not, however, render the bequest void.
23Whether the anti-ademption provision in s. 20(2) of the Succession Law Reform Act applies or not, the shares vested in the estate trustees in trust for Cheryl when Cam died, and it is their duty to administer the estate on that basis. It is the duty of the estate trustees to attempt to carry out Cam's directions to distribute the shares out of the estate to Cheryl in specie. They must attempt to accomplish the transfer of the shares to Cheryl in whatever manner they think most advisable. They have discretion as to when and how to seek the necessary consents and, if the consents are not forthcoming, they have some discretion to await a change of circumstances, or attempt to effect such a change. An estate representative "retains his duties for life, unless after administering the estate and having his accounts passed, the court releases him": Donovan W.M. Waters et al., eds., Waters' Law of Trusts in Canada, 3rd ed. (Toronto: Thomson Carswell, 2005), at p. 46, n. 22. It follows that the estate trustees' present inability to obtain consent to transfer the shares to Cheryl does not provide a basis for voiding the bequest. During the interim, the estate trustees, as bare trustees for Cheryl, must exercise the rights associated with the shares as she directs.
24Jack argues that Cheryl, by taking the position that Cam's specific bequest of shares to her was valid, is acting inconsistently with her fiduciary duties to Donny. His argument asserts that Cheryl's position inappropriately prefers her economic interests over those of Donny, as its success would have the effect of denying Donny, as a residual legatee, 25 per cent of the proceeds of the sale of Cam's shares that would result from the bequest's failure. Bing, on behalf of Donny, made submissions on appeal in support of Jack's position.
25I do not accept this argument. It conflates two very different matters. Cheryl is both an individual and a trustee. As an individual, she is entitled to receive gifts, including a gift of shares from Cam. She is permitted to protect that right through recourse to the legal system. If her pursuit of her personal rights is seen to conflict with her fiduciary obligations, the appropriate course of action is for the other trustees to act or seek directions to deal with the matter. Such action does not, however, bear any relevance to the validity of Cam's bequest, since neither Cheryl's fiduciary duties nor her fulfilment or breach of them can change the analysis concerning the bequest's validity: legal title to the shares is transmitted to the estate trustees by operation of law, who hold them in trust for her as a donee pursuant to Cam's Will.
26I would allow the appeal.
The Cross-Appeal
27Jack seeks leave to cross-appeal the costs order of the trial judge and requests an order that his trial costs be paid from the estate on a substantial indemnity basis. The force of Jack's application for leave to cross-appeal the costs order is considerably undermined by the result on the main appeal. The results are no longer mixed. All of the substantive issues at trial have been decided against Jack. I would refuse leave to cross-appeal the trial judge's costs decision.
Conclusion
28I would allow the appeal, set aside the trial judge's declaration that Cameron Edward Frye's specific bequest of his shares to Cheryl Vanessa Sylvestre is null and void, as well as his order that the shares be sold by the estate and substitute a judgment dismissing the action of John Arthur Frye in this regard.
29I would dismiss the application for leave to bring a cross-appeal against the trial judge's costs order.
30I would fix the costs of the estate solicitor of Cameron Edward Frye on the appeal and the motion for cross-appeal on a substantial indemnity scale in the amount of $20,802.17 to be paid out of the estate. I would fix the costs, both on the appeal and motion for cross-appeal, of the other parties on a partial indemnity scale to be paid by John Arthur Frye to Cheryl Vanessa Sylvestre in the amount of $45,000, and to Eldon Donald Frye in the amount of $15,000, all inclusive of disbursements and GST.
Appeal allowed.
Footnotes
- We are not concerned with the interpretation of the word "heir", as s. 27 of the Succession Law Reform Act, R.S.O. 1990, c. S.26, stipluates that, unless a contrary intention is apparent in a will, "heir" means "the person to whom the beneficial interest in the property would have gone under the law of Ontario if the testator or the other person died intestate".