COURT FILE NO.: FD251/13
DATE: June 26, 2014
SUPERIOR COURT OF JUSTICE – ONTARIO
FAMILY COURT
RE: Ronald Scott Furtney, the estate trustee of the late Philip Leroy Furtney, the applicant
AND:
Mary Diane Furtney, respondent
BEFORE: MITROW J.
COUNSEL:
Terry Hainsworth for the applicant
Stephen McCotter for the respondent
HEARD: April 25, 2014
ENDORSEMENT
INTRODUCTION
[1] The applicant brings a motion for two orders from the court: a) that the sum of $100,000 be set aside from the estate on account of anticipated legal fees and disbursements to be incurred by the estate trustee’s solicitor, Harrison Pensa, that the accounts be rendered quarterly to the estate, with copies to the respondent, and that if the respondent disputes the accounts, then she should serve a notice of dispute on Harrison Pensa and that the dispute can then be referred to me as the case management judge for assessment; and b) that certain disclosure be made by the respondent in relation to the respondent’s net family property.
[2] The disclosure issue was not argued as the parties were consenting to an order to go as asked in the applicant’s factum at paragraph 26(B) on page 7. That consent order is included in the order set out below.
[3] For reasons that follow, the relief sought by the applicant is granted.
FACTS
[4] A number of relevant background facts were discussed in my endorsement dated December 3, 2013 relating to two motions: a motion brought by the applicant dismissing the proceeding on the basis of delay; and the respondent’s motion for preservation of the estate assets to meet a potential equalization payment.
[5] A number of the facts were dealt with in that endorsement and will not be repeated here.
[6] The late Phillip Leroy Furtney, who died on September 21, 2007 (“the deceased”), and the respondent married in 1982 and separated in 2005.
[7] In February 2007, the deceased commenced an application seeking a divorce, equalization of net family properties, freezing assets, costs and pre-judgment interest.
[8] The respondent filed an answer containing a claim for divorce, spousal support, equalization of net family properties, freezing assets, sale of property, pre-judgment interest, costs and an accounting from proceeds of the business activities on disposition of assets within the States of Oklahoma, Texas and Florida, and also an accounting of all proceeds for a malicious prosecution pursuant to a lawsuit filed by the deceased against authorities in the State of Florida (hereinafter referred to as “the Florida action”).
[9] The order made December 3, 2013 dismissed the applicant’s motion for dismissal for delay.
[10] That order also provided that pending the disposition of this proceeding on a final basis, that the administration of the estate is suspended to the extent of $2.2 million and that that amount had to be retained by the estate, and not to be paid out, but that the order was without prejudice to the right of either party to bring a further motion to change this amount if subsequent fresh evidence became available that may affect the potential equalization payment owing to the respondent.
[11] That order charged the applicant with the responsibility to ensure that adequate assets were retained within the estate at all times to ensure compliance with the order.
A. The Value of the Estate
[12] The Florida litigation was discussed in the endorsement dated December 3, 2013 and the relevant facts are summarized in paras. 85 to 87 as follows:
[85] The respondent deposes that during the 1990s the deceased ran a number of Florida bingo halls through a Florida corporation called Bradenton Group Inc. (“Bradenton”) and that Bradenton is a corporation that is wholly owned by 800438 Ontario Limited, in respect of which the deceased disclosed a 50% interest. This interest was valued by the deceased at date of separation at $155,000 in his financial statement.
[86] In the mid 1990s, the deceased was arrested and imprisoned in the State of Florida for racketeering and Bradenton’s operations were shut down by the State of Florida under racketeering and corruption legislation. The charges against Bradenton and the deceased were eventually dropped and Bradenton and its subsidiaries sued the State of Florida for damages. The litigation arose during the 23 year marriage of the respondent and the deceased.
[87] The complicating factor arises because on the valuation date the status of the litigation was that the Bradenton lawsuit for damages had been dismissed by a jury. Therefore, the applicant takes the position that the Florida action had a value of nil on the valuation date. The respondent deposes, and the applicant does not dispute, that Bradenton was eventually successful in its appeal and that in August 2012 the State of Florida paid to Bradenton slightly in excess of $6.6 million in damages and interest as a result of the lawsuit that arose during the marriage of the respondent and the deceased.
[13] In his current motion, the applicant agrees that the damages were assessed at over $6.6 million and states that there is no disagreement between the parties that ultimately 800438 Ontario Inc. would be the beneficiary of those damages and that the estate has a 50% interest in 800438 Ontario Inc. The damages would be subject to various liabilities including legal fees.
[14] The previous endorsement noted (at para. 89) that no evidence was filed on the motion as to the current value of the estate. There was evidence filed in the form of an exhibit on the motion being the judgment on the passing of accounts that showed the value of the estate as at May 1, 2012 at just under $3.8 million.
[15] However, since that time, additional information has become available and the numbers have now been refined in the affidavit material filed by the parties in the present motion.
[16] The respondent has prepared a draft net family property statement (that is appended to the applicant’s affidavit). The respondent’s draft net family statement shows an equalization payment owing to the respondent in the amount of a little over $744,000. This amount does not include any potential amount owing from the proceeds of the Florida judgment.
[17] More importantly, and as confirmed in the respondent’s affidavit, a preliminary summary of the net asset position of the estate has been prepared by KPMG dated March 5, 2014. Although this report has not formally been filed as an exhibit, a copy of this report has been provided to the court and this report will be treated as if it was an exhibit in the material. There is no dispute between the parties as to what the report states. The court had previously ordered that the cost of this report be paid out of the estate assets.
[18] The report indicates that at this preliminary stage the net asset position of the estate is estimated to have a fair market value ranging from a low of $379,000 to a high of $1.233 million.
[19] The significant range of the potential net asset position of the estate arises primarily because of the current difficulty of valuing some of the potential liabilities of the estate. The KPMG report also warns that there may be income tax liabilities to the estate and that the impact of income tax liabilities, late filing fees and interest charges “may be material.”
[20] The respondent estimates, at a maximum, that the Florida litigation would add approximately $860,000 to the equalization payment, resulting in a total potential equalization payment of approximately $1.56 million, an amount that exceeds the highest net asset position of the estate as estimated by KPMG. However, it is noted that this is the respondent’s current best case scenario based on a draft net family property statement.
[21] It is also noted that the respondent’s draft net family property statement has not included values for amounts due to shareholder from the respondent’s corporation 1379798 Ontario Limited and the amounts apparently owing from various corporations in which the deceased had an ownership interest. The net family property statement shows these amounts to be determined.
[22] In relation to the equalization payment shown in the respondent’s draft net family property statement, the applicant submits that it is simply “just that – a draft” and that it is the applicant’s position that there are valuation errors contained in the draft net family property statement that may have a material impact on the equalization payment. However, the applicant has not provided his own draft net family property statement, nor has he otherwise attempted to quantify the valuation errors alleged.
[23] In the previous endorsement, at para. 88, the analysis based on the information available to the court at that time was that the equalization payment owing to the respondent may be as high as $2.176 million including the Florida litigation. That “high water mark” has now been reduced to approximately $1.56 million as discussed above and according to the respondent’s affidavit material.
POSITIONS OF THE PARTIES ON THIS MOTION
[24] The applicant submits that absent improper or unreasonable conduct on his part, that as estate trustee he is entitled to defend the claims brought by the respondent against the estate and to treat the legal costs arising therefrom as a proper estate expense, and to be reimbursed for those expenses from the estate.
[25] The applicant submits that he should not be called upon personally to pay the costs of this litigation, given that he is required to defend this litigation in his capacity as the estate trustee.
[26] The applicant points out that his elderly uncle was the original estate trustee and that the applicant (being the son of the deceased) later stepped in and consented to an order to act as estate trustee.
[27] The applicant also does not dispute that he, along with his brother, are the two residuary beneficiaries of the estate; that the applicant is a 30 per cent beneficiary and that his brother is a 70 per cent beneficiary.
[28] The respondent’s position is that the applicant has a personal interest in the estate as a residuary beneficiary. The respondent submits that given the potential maximum amount of the equalization payment, and considering that this exceeds the high range of current estimated net asset value of the estate, that there is a real likelihood that if any money is allocated now for the applicant’s fees that this could result, in effect, in the respondent having the fees come out of the equalization payment that is due to her.
[29] The respondent submits that the applicant should fund the fees of the estate litigation himself and that the issue as to whether any portion of those fees should be reimbursed by the estate should await the final conclusion of this matter. The respondent points out that she is currently funding her own fees and that allowing the applicant to have his fees reimbursed by the estate would be an unfair advantage to the respondent, especially considering the applicant’s personal interest as a residuary beneficiary.
DISCUSSION
[30] An important legal principle at play in the applicant’s motion deals with the right of the applicant, as estate trustee, to be indemnified for fees incurred in defending the respondent’s claim for an equalization payment (and other claims advanced by the respondent as summarized earlier).
[31] On the motion, the arguments centred around the respondent’s claim for an equalization payment.
[32] In a recent article[^1], Professor Albert H. Oosterhoff discussed the right of an estate trustee to be indemnified by the estate in respect of expenses reasonably incurred by the estate trustee in the execution of his or her duties, including indemnity for legal fees incurred in relation to legal actions involving the estate.
[33] Professor Oosterhoff explained the nature of the right of an estate to be indemnified as follows at pages 127-128 (footnote omitted):
As the word itself suggests, the right to be indemnified implies that estate trustees should bear the costs and expenses themselves first and then seek reimbursement from the estate assets. But this presents a problem. Many trustees and estate trustees do not have the wherewithal to pay the costs out of their own pocket. Nor should they have to. Their office is a socially desirable one which at one time, at least in the case of trustees, was carried out without remuneration.
Of course, a person who has been named to the office does not have to accept it. He may renounce. Most people would probably want to renounce once apprised of the fact that they must pay for all costs and expenses personally and can recover them only afterwards. On that basis few people would agree to take on the office. That is certainly not desirable, for the administration of estates is a socially necessary and desirable function that the law should promote and foster. And so it has long been the practice and the courts have long since recognized that trustees and estate trustees may pay the costs and expenses out of estate or trust assets. …
[34] As Professor Oosterhoff points out (at page 125), the courts have always held that estate trustees (and also trustees) are entitled to be indemnified for their reasonable expenses.
[35] The right to indemnity extends to legal fees. In Re Thompson Estate, 1945 2 (SCC), [1945] S.C.R. 343, Rand J. for the majority states at page 356:
… The general principle is undoubted that a trustee is entitled to indemnity for all costs and expenses properly incurred by him in the due administration of the trust: it is on that footing that the trust is accepted. These include solicitor and client costs in all proceedings in which some question or matter in the course of the administration is raised as to which the trustee has acted prudently and properly. …
[36] The fact that a trustee (or an estate trustee) may have a co-existing interest as beneficiary has not been viewed as a valid basis for denying costs. This issue was examined by the Supreme Court of Canada in Geffen v. Goodman Estate, 1991 69 (SCC), 1991 CarswellAlta 91 (S.C.C.). In that case, a woman, having a mental illness, inherited property. She settled the property upon a trust for herself for life, with the remainder to go to her children, nieces and nephews. The woman’s brother gave her input in settling the trust. Two of the woman’s brothers, and her nephew, were named as trustees. Following her death, the woman’s son, in his personal capacity and as executor of his mother’s estate, sued the trustees alleging undue influence. This action ultimately proved unsuccessful after the trustees were vindicated in the Supreme Court of Canada. On the issue of co-existing interests of a trustee, as beneficiary, the Court stated at para. 77:
77 Nor can there be any serious question that the appellants in defending the action were acting, not for their own benefit, but for the good of the trust. For William Geffen, of course, defending the action promoted both his personal interest as well as that of his fellow beneficiaries. While we have not been referred to a case in which trustees seeking indemnification from a trust were also beneficiaries of the trust, I do not consider the co-existing interest of trustee and beneficiary a valid basis for denying costs. Similarly, the fact that the Geffen brothers were acting in the interests of their children, nephews and nieces does not, in my view, cast any doubt upon the propriety of their actions.
[37] Further, in Geffen, supra, the Supreme Court of Canada clarified that trustees are entitled to recover legal costs reasonably incurred, stating as follows at para. 75:
75 The courts have long held that trustees are entitled to be indemnified for all costs, including legal costs, which they have reasonably incurred. Reasonable expenses include the costs of an action reasonably defended: see Re Dingman (1915), 35 O.L.R. 51. In [page 391] Re Dallaway, [1982] 3 All E.R. 118, Sir Robert Megarry V.C. stated the rule thus at p. 122:
In so far as such person [trustee] does not recover his costs from any other person, he is entitled to take his costs out of the fund held by him unless the court otherwise orders; and the court can otherwise order only on the ground that he has acted unreasonably, or in substance for his own benefit, rather than for the benefit of the fund.
[38] Section 23.1 of the Trustee Act, R.S.O. 1990, c T.23, codifies the right of a trustee (and this would include an estate trustee by virtue of the definition of “trust” in s. 1) to have expenses paid directly from trust property, or to be reimbursed from trust property:
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.
(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.
[39] Although the respondent relies on Craven v. Osidacz Estate, 2010 ONSC 6637, [2010] O.J. No. 5154 (S.C.J.), I find that the result in that case assists the applicant more than the respondent. In that case, Lofchik J. dismissed a motion by the deceased’s spouse requiring the executor to repay to the estate all amounts received by the executor from the estate, representing legal fees incurred by the executor in defending two actions brought against the estate by the deceased’s spouse, including a claim against the deceased’s estate arising from the deceased stabbing to death the parties’ eight-year-old son. The executor and his mother were the only beneficiaries of the deceased’s estate.
[40] Lofchik J. acknowledged the duty of the executor to defend the claims made against the estate; the issue of repayment of fees reimbursed to the executor was ordered adjourned to the passing of accounts by the executor. As to the request that the executor be restrained from using estate funds to pay further legal accounts, Lofchik J. ordered that the executor was restrained from doing so absent consent of all beneficiaries, and the deceased’s spouse, or approval of the court.
[41] In the case at bar, the applicant has a duty to defend the respondent’s claim; although he has a co-existing interest as beneficiary of the estate to extent of 30 per cent, that does not defeat his right to be reimbursed for legal fees reasonably incurred.
[42] The applicant’s proposal for court oversight as to payment of further fees is not dissimilar to the approach in Craven, supra.
[43] The respondent relies on DeLorenzo v. Beresh, 2010 ONSC 5655, [2010] O.J. No. 4367 (S.C.J.) and Coppel v. Coppel Estate, [2001] O.J. No. 5246 (S.C.J.). However, in Coppel, the court did not consider s. 23.1 of the Trustee Act (or its predecessor) in finding that it was impermissible for the estate trustee to pay litigation accounts from estate funds without the consent of the beneficiaries or a court order. This is specifically noted by Professor Oosterhoff (see page 136). The subsequent decision in DeLorenzo relied, in part, on Coppel.
[44] I do accept the analysis by Professor Oosterhoff, coupled with the authorities cited earlier in these reasons, and also considering s. 23.1 of the Trustee Act, that an estate trustee does not require the consent of the beneficiaries or a court order prior to having litigation expenses, reasonably incurred by the estate trustee, paid from estate funds.
[45] In the present case, the estate trustee, however, is faced with my previous order suspending the administration of the estate to the extent of $2.2 million. Although subsequent evidence now shows that the maximum potential equalization payment is in the range of $1.56 million (according to the respondent) and that the maximum estimated net asset value of the estate is less than that, no motion has been brought to amend the previous order as to the amount to be preserved by the estate.
[46] The applicant seeks, instead, an order specifically allowing the applicant’s fees to be paid from the estate.
[47] The respondent argues this case should be analogized to a situation where a spouse’s assets are frozen by court order to meet a potential equalization payment; where the assets may be insufficient to make the equalization payment; and where the spouse has asked to access some of the frozen assets to pay legal fees.
[48] I find that the respondent’s position ignores an important reality – which is the existence of an estate trustee and the duties and obligations of an estate trustee. This differentiates the case at bar somewhat from a case of a living spouse.
[49] I find, in all the circumstances, and taking into account the controversial and significant issue as to the value of the Florida litigation, that the applicant’s request is reasonable.
[50] The order below adds some additional protection to the respondent as the order is made without prejudice to the respondent’s right at trial to seek an order that the applicant reimburse the estate for any legal fees paid from the estate as a result of this order.
[51] The order below also addresses some case management matters.
ORDER
[52] For reasons set out above, an order shall issue as follows:
The sum of $100,000 shall be set aside on account of anticipated legal fees and disbursements from Harrison Pensa LLP in relation to this case.
Harrison Pensa shall render accounts quarterly to the applicant for its services in relation to this case, and provide copies to the respondent.
If the respondent wishes to dispute any of the accounts, she shall serve notice of dispute on Harrison Pensa.
Any dispute can be referred to me, as the case management judge, for assessment.
In the absence of a notice of dispute, the account shall be paid within 30 days, or the amount as assessed shall be paid.
The respondent shall produce within 30 days (or longer if agreed to by both parties) documents that confirm the following:
a) the value of her registered retirement savings plan(s) on the valuation date; and
b) proof of all of certificates of deposit, guaranteed investment certificates, or other interest-bearing accounts as of the valuation date.
The parties, through counsel, shall schedule a settlement conference, before me, in consultation with the trial coordinator. Counsel may request that the settlement conference be up to two hours in length. The settlement conference shall be scheduled for not later than October 31, 2014, unless otherwise ordered. Both parties are required to be present at the settlement conference.
This order is without prejudice to the respondent’s right, at trial, to request that all, or any part, of the amount set out in paragraph 1 for legal fees and disbursements, be repaid by the applicant to the estate, irrespective of whether a notice of dispute was filed or whether the court approved the amount.
The respondent shall file the affidavit of Mary Diane Furtney, sworn April 10, 2014, in the continuing record.
If the parties are unable to agree on costs, the parties may make written submissions as to costs of the motion, addressed to the trial coordinator, within 30 days, not to exceed 3 pages, plus copies of any offers, time dockets or authorities.
“Justice Victor Mitrow”
Justice Victor Mitrow
Date: June 26, 2014
[^1]: Oosterhoff, Albert H., Indemnity of Estate Trustees as Applied in Recent Cases (2013), 41 The Advocates’ Quarterly 123