The Children's Lawyer, litigation guardian for Penman et al. v. Penman et al.

[Indexed as: Penman (Litigation Guardian of) v. Penman]

Ontario Reports

Court of Appeal for Ontario,

Rosenberg, Cronk and Tulloch JJ.A.

January 30, 2014

119 O.R. (3d) 128 | 2014 ONCA 83

Case Summary

Trusts and trustees — Trustees — Liability — Appellant abdicating her duties as trustee by signing director's resolution authorizing co-trustee to invest trust funds in exercise of his unfettered discretion and then failing to make any inquiries regarding those investments — Application judge not erring in finding that appellant was personally liable for wrongfully exhausted trust funds — Relief under s. 35(1) of Trustee Act not being available as loss arose out of investment of trust property and as appellant had not acted reasonably — Exculpatory clause in trust indenture not protecting appellant as she improperly delegated her powers and discretion and did not function as co-trustee of trust — Trustee Act, R.S.O. 1990, c. T.23, s. 35(1).

The appellant, one of the trustees of a trust created by her late brother and her sister-in-law for the benefit of their grandchildren, was found to be jointly and severally liable, together with her nephews RP and MP, for trust funds wrongfully removed from the trust. The application judge found that the appellant signed a director's resolution authorizing her co-trustee MP to invest the trust funds in the exercise of his unfettered discretion, failed to make any inquiries about those investments, did not act reasonably in relation to her duties as a co-trustee and did not comport herself in accordance with her statutory duty of care set out under s. 27(1) of the Trustee Act. The application judge found that the appellant abdicated her duties entirely by improperly delegating all her powers, duties and authority to RP and MP. The appellant appealed.

Held, the appeal should be dismissed. [page129]

The application judge's findings of fact were open to her on the evidentiary record before her. The appellant was personally liable for the wrongfully exhausted trust funds unless she was relieved of liability by operation of law or under the terms of the trust indenture. Relief under s. 35(1) of the Trustee Act was not available to the appellant as the loss arose out of the investment of trust property and as the appellant had not acted reasonably. An exculpatory clause in the trust indenture did not protect the appellant as she improperly delegated her powers and discretion. The exculpatory clause was designed to protect trustees in their management and administration of the trust property. The appellant wholly abdicated her duties as a co-trustee, and did not function as a co-trustee of the trust.

Cases referred to

Wilson (Re), 1937 CanLII 95 (ON CA), [1937] O.R. 769, [1937] O.J. No. 314, [1937] 3 D.L.R. 178, [1937] O.W.N. 358 (C.A.)

Statutes referred to

Trustee Act, R.S.O. 1990, c. T.23, ss. 27(1), 35(1)

Authorities referred to

Waters, Donovan W.M., Mark R. Gillen and Lionel D. Smith, eds., Waters' Law of Trusts in Canada, 4th ed. (Toronto: Carswell, 2012)

APPEAL from the judgment of L.B. Roberts J. of the Superior Court of Justice dated March 18, 2013 finding that the appellant was jointly and severally liable for the wrongful removal of the trust property.

James A. Ironside and Heather McLeish, for appellant.

Susan J. Stamm, for respondent.

[1] Endorsement BY THE COURT: -- The appellant Mary Lou McGillvray appeals from the application judge's ruling that she is jointly and severally liable, together with her two nephews, Randal Penman and Mark Penman, for the sum of $453,048.20, plus interest, on account of trust funds wrongfully removed from a trust created by her late brother and her sister-in-law for the benefit of their grandchildren. At all relevant times, the appellant and Mark Penman were co-trustees of the trust. On this appeal, the parties accept that Randal Penman, although not named as a co-trustee, was a trustee de son tort of the trust. The appellant was also one of the executors of her deceased brother's estate.

[2] The appellant's central submission is that she acted honestly and reasonably, in good faith, and with the benefit of legal advice from her nephew, Randal Penman, an Alberta lawyer, in all her dealings with the trust, that she was "duped" by her two nephews who wrongfully used the trust funds for their own benefit, and that no act or omission on her part caused the admitted loss of the trust funds. [page130]

[3] The application judge disagreed. Although she did not reject the appellant's theory of wrongdoing by Mark and Randal Penman, she made multiple factual findings that the appellant breached her obligations as a co-trustee of the trust, including her fiduciary obligations, and that she knew more about her nephews' dealings with the trust funds than the appellant claimed.

[4] The application judge's key findings concerning the appellant were expressly based on her adverse assessment of the appellant's credibility and the reliability of her testimony. They included the following findings:

(1) the appellant signed a director's resolution authorizing her nephew Mark Penman to invest the trust funds in the exercise of his unfettered discretion;

(2) after so authorizing Mark Penman, the appellant failed to make any inquiries regarding the investment of the trust funds or her nephews' dealings with the funds;

(3) contrary to her contention, the appellant was not misled by her nephews regarding the use and investment of the trust funds; and

(4) the appellant did not act reasonably in relation to her duties as a co-trustee of the trust and did not comport herself in accordance with her statutory duty of care as a trustee, set out under s. 27(1) of the Trustee Act, R.S.O. 1990, c. T.23 (the "Act"). To the contrary, she abdicated her duties entirely, by improperly delegating all her powers, duties and authority as a co-trustee to her two nephews.

[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.

[page131]

Even if I were to accept Ms. McGillvray's evidence at its highest, other than a brief conversation concerning an investment of the trust funds in a GIC, it appears that, by her own admission, Ms. McGillvray barely read anything to do with the proposed investment of the trust funds but simply signed whatever was placed in front of her. She made no inquiries to understand all of the details of the investment. She signed a director's resolution to allow Mark Penman to do whatever he wished with the trust funds without the necessity of having to consult her further or obtain her authorization. She made no further inquiries of the progress or status of the investment of the trust funds. She simply assumed without any rational justification that things were going well.

[6] These key findings were open to the application judge on the evidentiary record before her. The appellant has failed to establish that they are tainted by palpable and overriding error. Accordingly, there is no basis for appellate interference with these findings.

[7] The application judge's factual findings are dispositive of the issue of the appellant's personal liability for the wrongfully exhausted trust funds unless she may be relieved of liability by operation of law or under the terms of the trust indenture.

[8] Before the application judge, the appellant argued that she could, and should, be absolved from personal liability on two grounds. First, she sought to invoke the court's authority under s. 35(1) of the Act to relieve a trustee from personal liability for breach of trust or for omitting to obtain the directions of the court in the matter in which the trustee committed the breach at issue.

[9] The application judge concluded that the appellant could not rely on the protection of s. 35(1) of the Act. She held, at para. 85:

Ms. McGillvray relies upon subsection 35(1) of the Trustee Act, which excuses trustees from liability for breaches of trust and failure to seek direction of the court where it is found that they acted honestly and reasonably. This relief is not available to Ms. McGillvray because the alleged loss arises out of investment of the trust property; and subsection 35(2) of the Trustee Act expressly provides that subsection 35(1) does not apply in these circumstances.

[10] We agree. Moreover, on the application judge's findings, relief under s. 35(1) is unavailable to the appellant on a second preclusive ground. As the application judge noted, 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.

[11] The appellant also relies, as she did before the application judge, on para. 8 of the trust indenture as a bar to any finding of personal liability as against her. Paragraph 8 reads in part: [page132]

The Trustee [sic] shall not be responsible for the acts or defaults of each other or for any error in judgment or for any act of omission or commission not amounting to actual fraud in the management and administration of the Trust Property. The Trustee shall not be personally liable for any monies to become due from or by any claims against the Trust Property or upon any investment executed by the Trustees under the provisions hereof.

[12] The application judge held that para. 8 did not apply to immunize the appellant from personal liability for her breaches of her duties as a co-trustee of the trust. She reasoned, in part, at para. 90:

Further, an exculpatory clause will not protect a trustee when it is found that the trustee improperly delegated the power or discretion in question. Each trustee must actively consider his or her discretion and will not be exonerated for passively acquiescing in the actions of a co-trustee. The law does not distinguish between passive and active trustees. In accepting a trusteeship, a trustee assumes a duty to the beneficiaries of the trust.

(Citation omitted)

[13] Again, we agree. In their leading text, Waters' Law of Trusts in Canada, 4th ed. (Toronto: Carswell, 2012), at pp. 981-82, Waters, Gillen and Smith suggest that there is some uncertainty in Canadian law concerning the validity of indemnity or exculpatory clauses in trust instruments in relation to a trustee's liability for gross negligence; however, they also state that clauses of this kind "will not protect the trustee when it is found that he improperly delegated [his or her] power or discretion". See, also, Wilson (Re), 1937 CanLII 95 (ON CA), [1937] O.R. 769, [1937] O.J. No. 314, [1937] 3 D.L.R. 178 (C.A.).

[14] Paragraph 8, the exculpatory clause in the trust indenture in question, is designed to protect trustees in their management and administration of the trust property. In this case, the appellant was found to have wholly abdicated her duties as a co-trustee in favour of others, by reason of her improper delegation of all her discretion, authority, powers and duties to her nephews. As a result, she did not function as a co-trustee of the trust, although she was obliged to do so. Nor was she engaged in the management and administration of the trust property. To the contrary, the appellant wrongfully delegated these responsibilities to others.

[15] In these circumstances, we agree with the application judge that the appellant is unable to bring herself within the protective ambit of para. 8 of the trust indenture.

[16] We observe that nothing in these reasons should be taken to mean that the appellant is without a potential remedy. She remains free to pursue indemnification from her nephews, Randal and Mark Penman, for their wrongdoing in relation to the trust, should she be so advised. [page133]

[17] For the reasons given, the appeal is dismissed. The Children's Lawyer sought nominal costs in the event of success on this appeal. We would therefore award the Children's Lawyer costs of the appeal, fixed in the amount of $2,500, inclusive of disbursements and all applicable taxes.

[18] We thank both counsel for their forthright and helpful submissions to the court.

Appeal dismissed.

End of Document