In the Matter of the Management of Property of the Benjamin Cochrane Trust
COURT OF APPEAL FOR ONTARIO DATE: 20230818 DOCKET: C69795
BEFORE: Fairburn A.C.J.O., Simmons and Zarnett JJ.A.
COUNSEL: Arieh Bloom and Jessica Karjanmaa, for the appellants/respondents by way of cross-appeal William and Carol Cochrane Brendan van Niejenjuis, Carlo Di Carlo, Dan Goudge and Saba Ahmad, for the respondent/appellant by way of cross-appeal Benjamin Cochrane
HEARD: January 24, 2023
ON APPEAL FROM: The judgment of Justice Breese Davies of the Superior Court of Justice, dated July 29, 2021, with reasons reported at 2021 ONSC 5228, 15 C.C.L.I. (6th) 99, and 2021 ONSC 7504, and 2022 ONSC 2941.
Fairburn A.C.J.O.:
Overview
[1] The appellants are the parents of the respondent, who suffered a serious brain injury when he was hit by a car in 1996 at the age of 12. The appellants brought an accident benefits claim on their son’s behalf and settled the lawsuit for over $400,000 in 2000. The money was invested in an annuity that made payments to the appellants in trust for the benefit of their son for about 17 years.
[2] The relationship between the appellants and respondent deteriorated over time. Eventually, the respondent alleged that the appellants had mismanaged the trust and they were ordered to pass accounts.
[3] The passing of accounts turned into a full-blown 14-day trial where the trial judge was faced with a daunting task. The appellants admitted to having administered the trust in cash and had little documentary evidence to show how the trust funds were spent over the 17-year period covered by their statement of accounts. The respondent disputed every single one of the more than 2,000 disbursements claimed.
[4] The trial judge found that the appellants had accounted for $253,144.11 of the $418,675.25 received by the trust during the relevant period of time. This left $165,531.14 unaccounted for. While the appellants claimed $131,038.42 in trustee compensation, the trial judge refused that amount because the trust had been so badly managed. Instead, she found that the appellants were entitled to $15,000 for their time spent administering the trust. She also denied them indemnification for legal costs related to the application to pass accounts.
[5] In the end, the appellants were ordered to repay the trust $150,531.14, plus prejudgment interest in the amount of $53,649.64. The trial judge also ordered that the appellants pay $90,000 in costs in relation to the passing of accounts to the respondent. In total, the appellants have been ordered to pay $294,180.78.
[6] The appellants now appeal and the respondent cross-appeals.
[7] There are five main issues raised on appeal:
- Unpaid disbursements: Did the trial judge err in disallowing reimbursement of properly incurred expenses that were paid by the appellants personally, when the reimbursement of out-of-pocket expenses is permitted under s. 23.1(1)(b) of the Trustee Act, R.S.O. 1990, c. T.23 (the “Trustee Act”)?
- Quantum meruit/equitable set-off: Did the trial judge err in failing to turn her mind to issues of quantum meruit and equitable set-off?
- Legal fees: Did the trial judge err in denying the appellants indemnity for their legal fees?
- Prejudgment interest: Did the trial judge err in her calculation of prejudgment interest?
- Costs: Did the trial judge err in ordering the appellants to pay costs to the respondent?
[8] On the cross-appeal, the respondent contends that the trial judge erred in passing the accounts, as the appellants failed to meet their onus of accounting for and explaining the disbursements charged against the trust. In the alternative, the respondent maintains that, even if the appellants met their onus, the trial judge erred by passing the accounts in the face of the appellants’ obvious breaches of their duties as trustees. The respondent also submits that the trial judge erred by awarding the appellants $15,000 as compensation for administering the trust, given that they failed to properly manage it. The respondent seeks repayment of the total amount received by the trust, minus the $21,289.40 that he admits he received from the trust. This would translate into the appellants paying $397,385.85, plus prejudgment interest and costs.
A. Background
(1) The Parties
[9] The two appellants have four children, including the respondent. The mother is a nurse and the father was a welder before his retirement.
[10] The respondent was hit by a car in 1996. The appellants succeeded in reaching a settlement of the accident benefits claim, which they brought on the respondent’s behalf, in 2000. The resulting funds were invested in an annuity. Monthly payments started in September of 2000. These payments will continue for the rest of the respondent’s life.
[11] The settlement was approved by Dunnet J., whose judgment provided that monthly payments were to be made to the appellants “in trust for the irrevocable benefit of [the respondent]”. There was no management plan prepared for the administration of the trust. The appellants say that they did not understand their obligations as trustees. [^1]
[12] For the first eight years, the monthly annuity payments were $2,500, indexed. In August of 2008, those payments were reduced to $1,405.13, indexed. The first annuity payment was made in September 2000. In April 2016, the respondent was effectively given control over the annuity, and in March 2017, the appellants were ordered by Morgan J. to forward all trust money received directly to the respondent. Shortly thereafter, the insurance company was ordered by Morgan J. to make the annuity payments directly to the respondent.
[13] There is no dispute that during the appellants’ administration of the trust, it received $418,675.25.
(2) The Administration of the Trust
[14] At trial, the appellants said that they relied upon a cost of care report prepared during the accident benefits litigation to ascertain what services were necessary for their son’s benefit. They also testified that they provided many of those services on their own.
[15] In explaining how they administered the trust, the appellants acknowledged that the trust was administered entirely in cash: they would withdraw the monthly annuity payment in cash and keep that cash in a safe in their home. They maintained that they would then use the cash to pay trust expenses as they arose. No records were kept of how much money was in the safe at any given time or how that money was spent.
(3) Passing of Accounts
[16] The trial judge was faced with an enormous task. The statement of accounts spanned 17 years and included 2,208 disbursements. The respondent challenged each one, as well as alleging misconduct.
[17] The laborious task of assessing each disbursement was complicated by a lack of supporting documentation. It was further complicated by the fact that many of the entries in the statement of accounts were misleading. The appellants fabricated “receipts” for services that they said were provided by third parties. This meant that the trial judge had to separate legitimate receipts from false ones. In addition, hundreds of disbursements shown as being paid from trust funds were actually never paid. These “unpaid disbursements” were for what the appellants described as “services” they had rendered as trustees and for which they had received no compensation because there were insufficient funds in the trust. Including disbursements that were never paid from the trust, the total disbursements in the statement of accounts came to $664,293.36, an amount that is actually $245,618.11 more than the trust even received during the relevant timeframe.
[18] In an effort to account for the apparent overspending, the appellants showed in their statement of accounts that they had loaned the trust the excess amount over the years. The trial judge described this accounting exercise as “fictitious”, since none of it was documented and the appellants acknowledged in their testimony that they never expected the respondent or the trust to repay those loans. Counsel for the appellants (different counsel than on appeal) made it clear that they were not seeking the repayment of the loans, but only included them in the statement of accounts “as a set off” should the appellants be found to owe the respondent any money.
[19] While the respondent called evidence at the trial, he did not testify.
B. Decision Below
[20] The trial judge dealt squarely with the issue of onus, explaining that it was for the appellants as the trustees to prove how the trust funds were spent. As she noted, both the appellants’ credibility and reliability, which were challenged, were central issues in the case.
[21] The trial judge also explained her methodology in terms of how she approached her task. She found that the “enormity of the account” made it impossible to address each disbursement individually. Accordingly, she attempted to group all the disbursements, including the “unpaid disbursements”, into categories. For each category, she first decided whether the expense was incurred “by the trust” or not. If it was not incurred “by the trust”, then she disallowed the expense. If it was incurred “by the trust”, she then decided whether the appellants had established that the expense was for the amount claimed and that the expense was properly incurred in accordance with the terms of the trust.
[22] The trial judge found that while the appellants did what they thought was best for the respondent as parents, they were misguided in how they administered the trust and failed to discharge their primary duty as trustees to account for the trust funds they received. Despite that failure, the trial judge was not satisfied that they had deliberately misused or misappropriated trust funds. She also found that while they had fabricated evidence, it was not done to conceal wrongdoing but rather because they had not understood their obligations as trustees and were making efforts to account for what they had done with the trust money over many years.
[23] The trial judge also found that the respondent had taken some unreasonable positions and made some unsubstantiated allegations against the appellants. For example, the respondent unreasonably refused to acknowledge that trust money was used to help pay for some of his expenses, such as his rent and car insurance, when he had little or no income.
[24] In the end, the trial judge analysed 7 categories of “unpaid disbursements” and 25 categories of other disbursements. As noted, she ultimately ordered the appellants to pay their son $294,180.78. This included unaccounted for trust money, prejudgment interest, and the respondent’s partial indemnity costs.
C. Analysis
[25] The parties have alleged that the trial judge made errors of law, mixed fact and law, and fact. It goes without saying that unless the parties can point to an error of law, deference is owed to the trial judge’s findings, which were made after the benefit of a 14-day trial. As I will explain, I am not satisfied that the trial judge erred in law or made any palpable and overriding errors, save for two small calculation errors.
The Appeal
(1) Did the trial judge err in disallowing reimbursement of properly incurred expenses that were paid by the appellants personally, when the reimbursement of those expenses is permitted under s. 23.1(1)(b) of the Trustee Act?
(a) The Parties’ Positions
[26] The appellants maintain that the trial judge erred in disallowing a number of legitimate disbursements because she did not understand that trustees may pay a trust expense personally and then recover that amount from the trust – a principle codified in s. 23.1(1)(b) of the Trustee Act. They claim that they paid for various expenses out of their own pockets and are now entitled to reimbursement. Given that there are no remaining trust funds, reimbursement would be by way of a set-off against the amount they are required to repay. In total, they claim $47,216.87 for a dozen different groups of expenses including: the respondent’s car insurance during one period and his rent during five periods, transportation costs, caregiving fees paid to the respondent’s grandmother, legal costs incurred by the respondent in defending a lawsuit, the cost of a prescription medicine, the cost of renting or purchasing a suit for special occasions, and one of the respondent’s credit card bills.
[27] The respondent disagrees that the trial judge ignored s. 23.1(1)(b) or otherwise erred in disallowing these expenses. He points to places where the trial judge’s reasons reflect an understanding that trust expenses paid by the appellants from their own funds could later be reimbursed from the trust in accordance with s. 23.1(1)(b). The respondent also argues that the appellants are seeking to shift their claim: at trial they claimed that they had already been repaid for these expenses from trust funds or had used trust funds to pay for them directly. Thus, they were shown as actual disbursements and not amounts owing in the statement of accounts. The trial judge made findings of fact against them on these points. Having been unsuccessful, they now say that they were never reimbursed. Finally, given the credibility and reliability findings made by the trial judge, this court can simply have no confidence regarding how the expenses were paid.
(b) Discussion
(i) Section 23.1 of the Trustee Act
[28] Section 23.1(1) of the Trustee Act reads as follows:
23.1 (1) A trustee who is of the opinion that an expense would be properly incurred in carrying out the trust may,
(a) pay the expense directly from the trust property; or
(b) pay the expense personally and recover a corresponding amount from the trust property. [Emphasis added.]
[29] Section 23.1(2) provides that the court may then disallow the payment or recovery if the expense was not properly incurred in administering the trust:
(2) The Superior Court of Justice may afterwards disallow the payment or recovery if it is of the opinion that the expense was not properly incurred in carrying out the trust.
(ii) The Trial Judge did not Ignore or Misapply s. 23.1 in Disallowing the Expenses
[30] In advancing their argument that the trial judge ignored or misapplied s. 23.1 of the Trustee Act, the appellants place particular emphasis on para. 27 of her reasons:
Given the enormity of the account, it is not feasible to address each disbursement individually. To the extent possible, I have addressed the disbursements in categories. For each category, I first decided whether the expense was incurred by the trust. In other words, was the disbursement paid by the trust or is it an unpaid disbursement included to offset any repayment order? If I found the disbursement was not paid by the trust, I have disallowed it. My task is to assess the propriety of expenses paid by the trust: Steven Thompson Family Trust v. Thompson, 2012 ONSC 7138, at para. 36. My task is not to assess whether an expense would have been approved had it been paid by the trust. If I found that a disbursement was paid by the trust, I then decided whether Bill and Carol have established that the expense was for the amount claimed and that it was incurred for Benjamin's benefit in accordance with the terms of the trust. [Emphasis added.]
[31] The appellants argue that this passage demonstrates that the trial judge failed to appreciate that trustees can personally pay for a trust expense and then obtain reimbursement from the trust. In other words, she was wrong to disallow the 12 groups of expenses merely because they were not “paid by the trust”.
[32] I do not agree that this passage, read in context, reflects a misunderstanding of s. 23.1 of the Trustee Act.
[33] The trial judge references s. 23.1 at the outset of her reasons:
As the trustees, [the appellants] were entitled to spend the trust money on goods and services for [the respondent’s] benefit: Trustee Act, R.S.O. 1990, c. T.23, s. 23.1. However, [the appellants] must now account for how [the respondent’s] trust money was spent. The issue for me to decide is whether [the appellants] have established that the disbursements from the trust were incurred in accordance with the terms of the trust [citations omitted]. If I find that a disbursement was inappropriately charged to the trust or is inconsistent with the terms of the trust, I can disallow it. I can also order [the appellants] to repay the trust for disallowed disbursements or unaccounted for funds: Trustee Act, s. 23.1(2) [citation omitted]. [Emphasis added.]
[34] The fact that this is the only reference to s. 23.1 in the reasons is not surprising. The provision was not the subject of much discussion at trial. Indeed, in closing argument, the appellants’ counsel made only a fleeting reference to it in his reply submissions.
[35] Despite the fact that the trial judge made no further explicit reference to s. 23.1, she did in several instances approve disbursements in situations where the appellants had paid expenses personally and then been reimbursed from the trust, which is consistent with s. 23.1(1)(b). For example, the trial judge noted that “[the mother] testified that [the appellants] bought [the respondent] anything he needed to work at Maple Creek and reimbursed themselves from the trust.” The trial judge accepted that those were appropriate trust expenses and allowed them.
[36] In contrast, she did not allow disbursements that were never paid or reimbursed from trust funds. The appellants testified that they paid various third-party expenses out of their own funds when there were insufficient funds in the trust. Similarly, when there were insufficient funds, they did not reimburse themselves. As the trial judge recognized, these were “loving parents” who “at every turn … did what they thought was best for [their son].”
[37] In the statement of accounts, the appellants accounted for some of the disbursements that were never paid from trust funds as “loans”, which the trial judge found to be fictitious. The loans were fictious because there was no contemporaneous documentation and the appellants admitted that they never expected their son or the trust to repay the loans. The loans were only included after-the-fact “to ensure the trust receipts match[ed] the artificially inflated disbursements” so as to prevent the appellants from having to pay anything to the respondent in case of a shortfall.
[38] With this context in mind, I understand the trial judge to be making several points in the impugned passage.
[39] First, she had to determine whether an expense was incurred at all. As discussed, that task was made all the more challenging by the lack of documentation and falsified receipts, and by the misleading nature of the statement of accounts. Looking at the trial judge’s findings related to the 12 groups of expenses at issue, it is evident that the trial judge had doubts in some cases whether the expenses had been incurred at all.
[40] Second, the trial judge not only had to determine whether the expenses had been incurred, but also whether they were incurred by the appellants in their role as trustees. As she recognized at the outset of her reasons, “[t]his [was] a difficult case because [the appellants] are both [the respondent’s] parents and the trustees of his trust.” In using the phrase “by the trust” in the impugned passage, I understand the trial judge to be distinguishing between amounts the appellants paid as trustees (“by the trust”) and other amounts they paid in their role as loving parents. If they decided to expend more than the trust ever received out of love for their son, that was a personal choice.
[41] Third, in the impugned passage, the trial judge specifically references “unpaid disbursement[s] included to offset any repayment order”. The vast majority of expenses included to offset any repayment order were “unpaid disbursements” for services the appellants said they had provided, which were not disbursements at all. These had to be weeded out in order for the trial judge to determine what portion of the trust funds the appellants could actually account for. I will return to these “unpaid disbursements” below.
[42] Fourth, I understand her statement that “[her] task [wa]s not to assess whether an expense would have been approved had it been paid by the trust” as a refusal to deal in conjecture. This was a case where the appellants, who had all of the serious responsibilities of trustees, had put together a questionable after-the-fact attempt to explain what had happened over 17 years, all in an effort to avoid paying the respondent back any money. In my view, the trial judge was simply and quite reasonably saying that she was not prepared to engage in speculation or hypotheticals in determining whether any money was owed.
[43] Therefore, on my reading, para. 27 does not reflect a misapprehension of s. 23.1 of the Trustee Act. Read in context, para. 27 of her reasons reflects the trial judge’s framing of the issues in the context of this particular case.
[44] Accordingly, I reject the argument that the application judge’s disallowance of the 12 groups of expenses was infected by legal error.
(iii) Calculation Error
[45] In making their s. 23.1 argument, the appellants attack the trial judge’s findings relating to the list of groups of expenses on a number of grounds unrelated to the interpretation of that section.
[46] Given that I have found that the trial judge made no legal error and her factual findings are entitled to deference, I see no merit to the appellants’ submissions, save for one small calculation error.
[47] The trial judge allowed rent for the period April 2006 to April 2008 at the rate of $650/month. I agree that she meant to capture 25 months, not 24 months. Thus, instead of allowing rent expenses in the amount of $15,600, the amount should have been $16,250. Therefore, there should be an adjustment of $650.
(2) Did the trial judge err in failing to turn her mind to issues of quantum meruit and equitable set-off?
(a) The Parties’ Positions
[48] The appellants took the position at trial that if the trial judge found that they had not properly accounted for all trust funds, they should be entitled to compensation for services that they had provided to their son, services which fell into seven categories: case management, academic support, supervision, bookkeeping, management of banking activities, driving lessons and surety supervision. In other words, the appellants sought a set-off for amounts they said they could have charged the trust but did not, as against any amount they could not properly account for and had to repay. [^2]
[49] On appeal, the appellants maintain that the trial judge erred by failing to turn her mind to the doctrines of quantum meruit and equitable set-off. Had she done so, she would have assigned a value to the services they provided as trustees over so many years, and the value would have been set-off against any amount owing. The appellants say that the trial judge erred by instead focussing on the fact that the “unpaid disbursements”, representing the services they provided, were not paid from the trust funds. As a result of her flawed decision, the trust has been unjustly enriched by the valuable services provided by the appellants for the respondent’s benefit.
[50] In response, the respondent contends that the appellants did not seriously pursue a quantum meruit claim before the trial judge. Indeed, they never mentioned quantum meruit or unjust enrichment in their closing submissions. While they mentioned “set-off”, the respondent says this was in relation to trustee compensation, legal expenses, or on the basis of the notional “loans” that they allegedly provided to the trust; it was not on the basis of unjust enrichment. In any event, any quantum meruit claim would have been doomed to fail for a number of reasons, including that the appellants, in their capacity as parents, likely intended to provide the services gratuitously.
[51] As I will explain, I reject the appellants’ submissions on this point.
(b) Discussion
[52] In my view, the trial judge did not err or “los[e] sight of the question to be determined”, as the appellants contend. Rather, she directly confronted how the appellants framed their argument. The appellants advanced a position that: (1) they were seeking payment of the “unpaid disbursements” for their services as a set-off if (and only if) there was a “shortfall” in their administration of the trust, and (2) the set-off could be accomplished either by allowing the “unpaid disbursements” or through an award of trustee compensation. I see no reason to interfere with her treatment of those issues.
[53] It is not surprising that the trial judge did not use the terms quantum meruit or unjust enrichment in her reasons. The appellants are able to point to one, and only one, brief reference to the term quantum meruit in the written materials that were before the trial judge (in their Reply to Fresh as Amended Notice of Objection to Accounts). They have pointed to no references to the term “unjust enrichment”.
[54] As for oral submissions, the terms are similarly absent. Instead, the appellants focussed upon what they characterized as their claim for “set-off”. The following passage from the appellants’ counsel’s opening submissions provides a window into what the appellants were actually seeking at trial and how they were asking the trial judge to deal with the issue of compensation and “unpaid disbursements” for services they said they had rendered:
So again, if we go to the end of the accounts, to the schedule title loan from [the appellants] starting at page 183 of the accounts – I’m not asking Your Honour to flip there now, I’m just saying it’s there – there is an annual table for the shortfalls, there is a monthly table for the shortfalls and the key is that over the 17 years the total loan amount reflecting uncompensated services provided by [the appellants] at the rates and time recommended in the cost of care report total together $245,000 to $245,618.11. Those are at 20 year old rates without interest. I stress they do not want any money repaid to them. The accounts also contain a compensation calculation. [The appellants] do not want any compensation either. We have made this clear in correspondence. These are simply set offs in the event this court agrees with any of [the respondent’s] objections. [The appellants] simply do not want to pay [the respondent] anything. They are not [out] of pocket a huge amount notionally for their time and they are not claiming compensation [except] as a set off to any objections this court may, may [sic] agree with of [the respondent’s] but they do want their legal costs paid. [Emphasis added.]
[55] This position – that they sought set-off (either on the basis of the “loans” representing uncompensated services or by way of trustee compensation) if and only if they would otherwise be ordered to repay any amount – was repeated in the appellants’ closing arguments. Notably, this repeated framing of the arguments again contained no reference to quantum meruit or unjust enrichment terminology:
[COUNSEL]: … okay so, I mean [the appellants] don’t want any money. The efforts that they went to are reflected in the accounts. They wouldn’t want a penny if the court accepts that they don’t owe [the respondent] any money. They don’t want a penny of compensation. So the entire question of whether they are double claiming, the answer is, if the court doesn’t accept that it’s proper to include as disbursements, which is really set-offs, you know we are really setting off — if the court doesn’t accept that it’s proper to include those amounts [for the work they did] as disbursements, then … they would want that via compensation whether it’s the percentages being increased radically or I think more appropriate would be the court awarding a special fee for that work.
[COUNSEL]: ... If Your Honour finds the [appellants] did all this work, then, did all this work and it’s fair that they be compensated, or not compensated, but it’s fair that they use that as a set-off for any amounts that they can’t, they can’t prove, any disbursements that they can’t prove, then these are alternative ways of, of creating that, of, of, not creating, these are alternative ways of, of, of arriving at that set-off. Either in the accounts and disbursements, or in the compensation calculation, and I think the simplest way to do it is to use the correct numbers, use the usual percentages and then apply a special fee for compensation equating to all the work they did which is set-off against what they can’t prove. [Emphasis added.]
[56] This argument was fully understood and addressed by the trial judge.
[57] For example, at the outset of her reasons, she acknowledged that the appellants’ position was that if they were to be ordered to repay any amount to the respondent, that repayment order should be set-off in recognition of the valuable unpaid services they had provided. In particular, she said:
[The appellants] do not have receipts or documentation to support most of the disbursements in the Statement of Accounts. Nevertheless, they argue that they have fully accounted for the $418,672.25 received by the trust. [The appellants] also ask that any order I make requiring them to repay the trust be offset by the amount they are entitled to receive as trustee compensation.
[The appellants] testified that they only included their unpaid services as disbursements in the account to offset any expenses that are disallowed and to reduce the chance they will be required to repay the trust. [Emphasis added.]
[58] These passages (and more) clearly demonstrate that the trial judge understood that the appellants were asking for set-off either by way of the hundreds of “unpaid disbursements” included in the statement of accounts or by way of their claim for trustee compensation. As she noted later in her reasons, they claimed “unpaid disbursements” for services allegedly rendered totaling $218,670.08 and trustee compensation in the amount of $131,038.42. The trustee compensation sought as “set-off” constituted around 30 percent of the total trust funds the appellants had administered.
[59] The trial judge disallowed the “unpaid disbursements” relating to services the appellants said they had provided to the respondent. As was her prerogative, the trial judge concluded that these “unpaid disbursements” were inaccurate and misleading:
The Statement of Accounts contains hundreds of disbursements for services that [the appellants] purportedly provided to [the respondent] or the trust. There are disbursements for case management services, bookkeeping services, banking services, academic support and general supervision. The Statement of Accounts shows all of these disbursements as having been paid to [the appellants]. [The appellants] submitted signed receipts for most of these disbursements that appear to confirm they were paid for their services ….
[The appellants] both testified that they were not actually paid by the trust for their services. [The mother] testified there was never enough money in the trust to pay her and [the father] for the services they provided as trustees. [The appellants] testified that they only included their unpaid services as disbursements in the account to offset any expenses that are disallowed and to reduce the chance they will be required to repay the trust. These “unpaid disbursements” should not have been included in the Statement of Accounts. They distort and distract from the truth of what happened with [the respondent’s] money.
The unpaid disbursements and the fictitious loans [created to reflect the unpaid disbursements] render the Statement of Accounts inaccurate and misleading. They also make it difficult to decipher what actually happened to the cash that [the appellants] withdrew from the trust account each month. [Emphasis added.]
[60] In light of these findings, which are owed deference, I see no basis to interfere with her disallowance of the fictional disbursements, which were matched by fictional loans. In the trial judge’s words, these were “unpaid disbursements included to offset any repayment order” as opposed to amounts “paid by the trust”.
[61] It was only once she had determined the “truth of what happened” – or what disbursements to allow or disallow – that set-off came into play, since set-off was, as the appellants argued, only required if there was a shortfall. Consistent with the appellants’ submissions, after reviewing the disbursements claimed in the statement of accounts, the trial judge went on to consider whether the appellants were entitled to set-off in discussing trustee compensation.
[62] The appellants claimed they were entitled to $131,038.42 in trustee compensation, of which almost $100,000 was for “care and management” and the balance was for “receipts and disbursements”. The trial judge found that the parents could not receive “care and management” fees seeing as they did nothing to invest or manage the trust funds, other than withdrawing cash and putting it into a safe. As for the “receipts and disbursements”, the trial judge concluded that even there, the appellants had miscalculated what they said was owed.
[63] Notably, the trial judge considered the time that the appellants spent administering the trust, but explained that she was not prepared to grant them a significant award of trustee compensation due to their failure to fulfill their primary duty to account for the trust funds they received. In the end, she only allowed for a “modest” set-off of $15,000 in trustee compensation.
[64] There is no basis upon which to interfere with the trial judge’s finding that only a modest set-off was appropriate in the circumstances. As she noted, the appellants had failed to fulfil their duty as trustees to keep proper accounts. Further, they acknowledged that they “never expected [their son] or the trust to repay the loans.” These findings of fact, to which deference is owed, undermine the appellants’ suggestion that the trust was unjustly enriched by the services they provided to their son. At the end of the day, the appellants’ submission is really an attack on the trial judge’s findings of fact.
[65] In conclusion, the trial judge was alive to the appellants’ position that, if there was a shortfall, there should be a recognition of the value of the services they provided by means of a set-off. Not only was she alive to their position but she dealt with it head on. Her findings on this point are entitled to deference.
(3) Did the trial judge err in denying the appellants indemnity for their legal fees?
(a) The Parties’ Positions
[66] The appellants contend that the trial judge erred in denying them indemnity for legal fees and other expenses that they incurred in their passing of accounts. The principle that a trustee is entitled to be indemnified for reasonably incurred expenses extends to legal fees: Trustee Act, s. 23.1.
[67] The respondent takes a different view, claiming that there is no reason to interfere with the trial judge’s decision, since it was the appellants’ conduct that caused an unnecessarily lengthy and expensive hearing: Zimmerman v. McMichael Estate, 2010 ONSC 2947, 103 O.R. (3d) 25, at para. 125, per Strathy J. (as he then was).
[68] I would not accede to this ground of appeal.
(b) Discussion
[69] The appellants stress that trustees cannot be deprived of properly incurred legal fees without good reason, relying on Birks v. Micklethwait (1864), 33 Beav. 409:
Now, nothing ought, I think, to be adhered to more sacredly than the general principle, which is, that a trustee or executor having done his duty, having faithfully accounted, and having brought forward the estate committed to his charge, should not be deprived of his costs upon light grounds.
[70] I note, though, that the principle laid down in Birks – that trustees should not, generally speaking, be deprived of costs – is premised on the trustee “having done his duty”, and “having faithfully accounted”.
[71] In this case, the trial judge found that the appellants had failed in their primary duty to account, had rendered accounts that were misleading, and had falsified documentation. She also found that the trial “was unduly long and complicated” because they failed to keep proper accounts and that “[m]ost of the time and expenses associated with th[e] trial could have been avoided” had they fulfilled their duty. I would not interfere with the trial judge’s decision to require the trustees to pay their legal fees and expenses personally in these circumstances.
(4) Did the trial judge err in her calculation of prejudgment interest?
[72] The appellants also claim that the trial judge made a number of calculation errors when determining the amount of prejudgment interest. These alleged errors are not legal in nature. Rather, they pertain solely to the math that was done.
[73] The trial judge concluded that “[t]he prejudgment interest on disallowed disbursements that [the appellants] said were paid from the trust is $53,649.64 as set out in the spreadsheet prepared by [the respondent’s] counsel.” The spreadsheet upon which the trial judge relied in determining prejudgment interest was filed on appeal.
[74] After carefully reviewing the spreadsheet, along with the rest of the materials and submissions of the parties, I find no reversible error in the trial judge’s decision to rely on this spreadsheet to calculate prejudgment interest, save for one mathematical error raised by the appellants.
[75] As the appellants point out, the trial judge awarded prejudgment interest on expenses charged to the trust between April 19, 2016 and May 15, 2017, a period during which the respondent effectively had full control of the annuity funds. The disputed amount is $440.01 in total. The trial judge accepted that the respondent assumed control of the annuity in April 2016. Therefore, the appellants argue that any expenses they charged (and which were disallowed) pertaining to this timeframe should not attract interest, as they could not have reduced the amount of the trust which was in the respondent’s hands. They are right. The appellants should not have been charged prejudgment interest for this period and it ought to be deducted from the total amount of prejudgment interest.
[76] As a result, I would vary the order for prejudgment interest from $53,649.64 to $53,209.63.
(5) Did the trial judge err in ordering the appellants to pay costs to the respondent?
(a) The Parties’ Positions
[77] The appellants seek leave to appeal costs, and if leave is granted, submit that there should be no award of costs, given the respondent’s conduct. That conduct is said to include seeking a baseless certificate of pending litigation in relation to the appellants’ home, making unsubstantiated allegations of misconduct, taking unreasonable positions, and failing to narrow the issues before trial.
[78] The respondent submits that leave to appeal costs should be refused. In the alternative, he submits that the costs appeal should be dismissed, since the award is not plainly wrong or derived from an error in principle.
(b) Discussion
[79] This court recently articulated the test for granting leave to appeal a discretionary costs award and the standard for setting aside such an award in The Catalyst Capital Group Inc. v. West Face Capital Inc., 2023 ONCA 381, at para. 167:
To grant leave, there must be strong grounds upon which the appellate court could find that the judge erred in exercising his discretion: Brad-Jay Investments Limited v. Village Developments Limited (2006), 218 O.A.C. 315 (C.A.), at para. 21, leave to appeal refused, [2007] S.C.C.A. No. 92. Setting aside a costs award on appeal may only follow where the motion judge has made an error in principle or if the costs award is plainly wrong [citation omitted].
[80] Here, the trial judge found that the respondent was entitled to costs as the prevailing party. She fixed costs at $90,000 on a partial indemnity basis. She took into account the respondent’s conduct in deciding that substantial indemnity costs were not appropriate, finding that the respondent “should not be rewarded for his unreasonable behaviour with an enhanced cost order”. She also took the respondent’s conduct into account in determining the quantum of costs.
[81] I would refuse leave. There are not strong grounds to doubt the trial judge’s discretionary costs decision. She explained why the respondent was entitled to costs and why the costs were payable on a partial indemnity scale, and she justified the quantum. In doing so, she took into account the respondent’s conduct, among other factors. Her decision is entitled to deference.
(6) Conclusion: The Appeal
[82] The appellants have not pointed to any reversible errors, save for two small calculation errors.
[83] I now turn to the cross-appeal.
The Cross-Appeal
(1) Did the trial judge err by passing the accounts and improperly relieving the appellants of their onus?
(a) The Parties’ Positions
[84] The respondent, who is the appellant on the cross-appeal, submits that the trial judge erred by passing the accounts and, in effect, relieving the appellants (the respondents on the cross-appeal) of their onus to prove and substantiate the truth, accuracy, and appropriateness of their claimed disbursements. Due to their lack of recordkeeping, the appellants failed to meet their onus of accounting for and explaining the disbursements charged against the trust. They were unable to demonstrate what they did with the trust funds and so they should have been required to repay the trust for all the disbursements claimed.
[85] In the respondent’s submission, the trial judge had to effectively guess what the appellants did. Indeed, she observed that the appellants’ conduct made it “difficult to decipher what actually happened to the cash that [the appellants] withdrew from the trust account each month.” This, says the respondent, ought to have been dispositive of the application.
[86] The respondent also contends that the trial judge failed to undertake the exercise that she was required to take for the passing of accounts. In particular, he takes issue with the trial judge’s “categorical approach”, whereby she “assessed each category of expenses in isolation, unmoored from the sequence of transactions and divorced from the context of the [a]ppellants’ (mis)management of the entire trust over 17 years.” Further, she is said to have assumed that certain amounts were likely spent by the trust for the respondent’s benefit given his lack of income at the time, which effectively reversed the burden of proof.
[87] The appellants disagree with the respondent’s claims that the trial judge applied an incorrect approach. A passing of accounts is meant to be a summary process and not a line-by-line audit. As is common in passing-of-account proceedings, especially where there are a multitude of objections, the trial judge chose to address the impugned disbursements in her reasons by category.
(b) Discussion
[88] I am not persuaded by the respondent’s submissions on this point.
[89] First, the trial judge recognized that the burden of proof lay squarely with the appellants and that it could be satisfied in various ways:
Invoices and receipts will often be the simplest and most reliable way to prove expenses paid from a trust. But receipts and invoices are not the only way for [the appellants] to satisfy their burden of proof. I can draw reasonable inferences from the testimony and available documentary evidence. Even without receipts and invoices, I can find that some or all of the disbursements claimed are legitimate. However, without supporting documentation, [the appellants’] credibility and the reliability of their testimony take on great significance.
The onus is on [the appellants] to prove how [the respondent’s] trust funds were spent. [The respondent’s] position is clear. He does not accept the validity of the accounts and he calls upon [the appellants] to formally pass their accounts, as he is entitled to do. Their evidence was vigorously tested in cross-examination. Their credibility and reliability were challenged and remain a central issue in this case. [Emphasis added.]
[90] The trial judge also recognized that she was not required to accept the appellants’ testimony just because there was no evidence to contradict it:
[The respondent’s] decision not to testify does mean there is an absence of evidence from him about certain important issues in this trial. It also means that there is no evidence to contradict some of [the appellants’] testimony. The absence of evidence from [the respondent is relevant to my resolution of some contested issues. But I am not required to accept [the appellants’] testimony just because there is no evidence to contradict it. For each issue, I must decide whether [the appellants’] testimony is credible and reliable on its own or when considered together with other evidence, including the evidence [the respondent] called to contradict them. If I accept [the appellants’] evidence about a particular issue, they will have satisfied their burden in respect of that issue without any need to draw an adverse inference against [the respondent]. If I do not accept [the appellants’] evidence about a particular issue or disbursement, they will not have discharged their burden. Drawing an adverse inference against [the respondent] based on his decision not to testify cannot bolster evidence I have otherwise found to be incredible or unreliable. [Emphasis added.]
[91] The trial judge did not improperly relieve the appellants of the burden on them. Nor did she make guesses in their favour. As is evident from her reasons, she was alive to certain deficiencies in the statement of accounts and the evidence. However, she did not reject the appellants’ evidence wholesale. Rather, she did the laborious work of assessing the evidence before her, deciding what evidence to accept and what evidence to reject, cognizant that the appellants bore the burden of proof.
[92] Second, the respondent also takes issue with what he describes as the trial judge’s “categorical approach”.
[93] The trial judge found that “[g]iven the enormity of the account,” it was simply “not feasible to address each disbursement individually.” Instead, she structured her reasons by dealing with categories of disbursements. Within the categories, she addressed particular disbursements, and did not necessarily accept or reject every disbursement.
[94] In my view, she approached her analysis in a logical and reasonable manner in light of the statement of accounts before her. Every judge hearing a passing of accounts need not follow an identical approach or methodology. Depending on the circumstances, it may be appropriate to deal with disbursements by category, as the trial judge did in this case: see e.g., Toller James Montague Cranston (Estate of), 2021 ONSC 1347, 65 E.T.R. (4th) 84, aff’d 2022 ONSC 6636, 82 E.T.R. (4th) 292; Steven Thompson Family Trust v. Thompson, 2012 ONSC 7138, 84 E.T.R. (3d) 24.
[95] In summary, I am not satisfied that appellate intervention is warranted on the basis that the trial judge erred in terms of onus or approach.
(2) In the alternative, if the appellants met their onus, did the trial judge err by passing the accounts when the appellants breached their duties as trustees?
(a) The Parties’ Positions
[96] The respondent submits that the trial judge erred by passing the accounts and failing to take into account the fact the appellants breached their duties as trustees, even though the breaches were pleaded in his Fresh as Amended Notice of Objection to Accounts.
[97] He points to the trial judge’s comment, at para. 274 of her reasons, that she did “not need to rule on these broad allegations of misconduct to resolve the issues in this case.” He says that statement is incorrect, as the appellants’ breaches of trust were relevant to whether the trial judge should have passed the accounts.
[98] In making this argument, he highlights four points regarding the appellants’ breaches that ought to have been considered.
[99] First, he submits that the claim for $218,670.08 for unpaid disbursements for services purportedly provided to the respondent constituted improper self-dealing. He emphasizes that trustees are prohibited from using trust assets to pay themselves for services and are prohibited from earning any profit from the trust. He also points out that the appellants claimed expenses from the trust for various disbursements for their own personal benefit, including family vacations.
[100] Second, the respondent submits that the appellants commingled the trust funds with their own funds. They had the burden to prove what part of the money they claim to have spent was their own as opposed to trust funds, which they failed to do.
[101] Third, he submits that, in failing to maintain records and administering the trust in cash, the appellants failed to meet the requisite standard of care. The respondent further claims that the appellants’ explanations about their decision to administer the trust on an exclusively cash basis are not credible.
[102] Fourth, he points to the trial judge’s finding that the appellants “failed to discharge their primary duty to account for the trust funds they received.”
[103] In light of these breaches, says the respondent, it was an error for the trial judge to pass the accounts and apply the court’s “stamp of approval”.
[104] In response, the appellants submit that the trial judge correctly declined to rule on the allegations of breach of trust. Claims for breach of trust are rarely litigated in the course of a passing of accounts and should be litigated by way of a separate action.
(b) Discussion
[105] Reading the trial judge’s reasons wholistically, she was alive to the allegations of misconduct made against the trustees, including the four points that are raised on appeal, and addressed them insofar as they were relevant to the task before her – the passing of accounts.
[106] Before turning to the trial judge’s reasons, it is important to review the nature of the respondent’s objections, as set out in his Fresh as Amended Notice of Objection to Accounts.
(i) The Fresh as Amended Notice of Objection to Accounts
[107] The respondent’s Fresh as Amended Notice of Objection to Accounts begins with an objection to the amount of compensation claimed by the appellants on the basis that they failed to act in his best interests. The ways in which the appellants did so were then “particularized below”.
[108] The Fresh as Amended Notice of Objection to Accounts goes on to set out the grounds upon which the respondent objected to the statement of accounts.
[109] It begins with an objection that the appellants engaged in self-dealing, by appropriating for themselves trust assets, and incurred expenses that were not for the respondent’s benefit.
[110] It continues to object to disbursement after disbursement on various grounds, including that the appellants had failed to prove that they were incurred.
[111] The Fresh as Amended Notice of Objection to Accounts concludes as follows:
As is particularized in paragraphs 1 through to 7 of this Notice of Objection, the Trustees have failed to meet the standard of care and diligence required of a trustee in administering a trust and they have not administered the Trust in an open and transparent manner. [Emphasis added.]
[112] Therefore, while the Fresh as Amended Notice of Objection to Accounts includes allegations of misconduct, these are not free-standing claims of wrongdoing made in support of a claim for damages or other relief. Rather, the allegations, as particularized throughout the Fresh as Amended Notice of Objection to Accounts, detail the basis upon which the respondent objected to the statement of accounts.
(ii) The Trial Judge’s Reasons
[113] In the impugned paragraph, which is found in the concluding section of her reasons, the trial judge stated that she did not need to rule on three “broad allegations of misconduct” (that the appellants failed to act in the respondent’s best interests, misappropriated trust funds, and acted fraudulently and negligently) to resolve the issues before her:
[The respondent] made several allegations about [the appellants] in his Notice of Objection. He alleges they failed to act in his best interests. He alleges they misappropriated his trust funds for their own use. He alleges they acted negligently and fraudulently. I do not need to rule on these broad allegations of misconduct to resolve the issues in this case. I have stayed focused on the task of assessing whether [the appellants] have proven the disbursements in the Statement of Accounts are accurate and consistent with the terms of the trust. [Emphasis added.]
[114] I see no error in the trial judge’s statement that she did not need to rule on the three “broad allegations”. Rather, she was right to stay focussed on assessing the legitimacy of the disbursements, taking into account the respondent’s objections to them.
[115] In my view, the respondent’s submission misunderstands the nature of the passing of accounts process. Just because a trustee has committed a breach of trust, it does not mean that a court need refuse to pass the accounts writ large. For example, in Simone v. Cheifetz (2000), 36 E.T.R. (2d) 297 (Ont. C.A.), this court upheld the judgment on the passing of accounts (subject to one small accounting error), even though the trustee was in breach of his fiduciary duties.
[116] Furthermore, while the trial judge stayed focused on the task at hand, she was very much alive to the allegations of misconduct and addressed them insofar as they were relevant. She found that some of the respondent’s allegations were made out and others were not.
[117] For instance, she adverted to the appellants’ failure to administer the trust with reasonable skill and prudence by administering the trust in cash and not keeping accurate records. In light of their failure to discharge their duty to account, they were unable to prove how all the trust money was spent and they were entitled to only modest trustee compensation.
[118] On the other hand, in assessing whether an enhanced cost award was justified, she noted that the allegation that the appellants had acted fraudulently was not proven. While the appellants were unable to account for all the funds they received and had misguidedly decided to fabricate documents, there was no evidence that they had done so to try to conceal their actions or defraud the trust.
[119] In conclusion, the trial judge did not err in proceeding to pass the accounts, with adjustments, in the face of the appellants’ breaches.
(3) Did the trial judge err in awarding the appellants trustee compensation?
[120] Finally, the respondent submits that the trial judge erred in awarding the appellants $15,000 in trustee compensation. He says that given their failure to keep proper accounts over 17 years and other conduct unbecoming a fiduciary, the appellants should have been denied any trustee compensation. The appellants disagree.
[121] The trial judge took into account the appellants’ failures as trustees in assessing trustee compensation. As noted above, she found that the amount of trustee compensation sought by them was “unreasonable given that they failed to discharge their primary duty to account for the trust funds they received”. Nonetheless, she awarded them a “modest” compensation amount of $15,000, which is the equivalent of less than $900/year (or less than $75/month) over the 17 years. I am not satisfied that the trial judge made a reversible error in making such an award.
(4) Conclusion: The Cross-Appeal
[122] In conclusion, I would dismiss the cross-appeal.
D. Conclusion
[123] I affirm the judgment below, save for two small calculation errors. The amount of allowable disbursements is increased by $650 and the amount of prejudgment interest is decreased by $440.01. Thus, the total in para. 3 of the judgment, is reduced from $204,180.78 to $203,090.77.
[124] Given the lack of success of both parties on the appeal and cross-appeal, each side shall bear their own costs.
Released: “August 18, 2023 JMF”
“Fairburn A.C.J.O.”
“I agree. Janet Simmons J.A.”
“I agree. B. Zarnett J.A.”
[^1]: The appellants have brought a lawsuit against their lawyers from the time of the accident, alleging a failure to explain their obligations as trustees. [^2]: I note that the trial judge rightly pointed out that it is a criminal offence for a surety to accept indemnity from the person for whom they are acting as a surety: Criminal Code, R.S.C. 1985, c. C-46, s. 139(1)(b).