Mowry v. Groome, 2016 ONSC 7850
CITATION: Mowry v. Groome, 2016 ONSC 7850
COURT FILE NO. 212/13 (Peterborough)
DATE: 20161214
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Christopher Mowry, estate trustee of the estate of Charles William Groome
Applicant
– and –
Cullen Christopher Groome and Miles Manser Groome
Respondents
Jeffrey Ayotte and Michael Gunsolus, for the applicant (December 1, 2015, only)
Christopher Mowry, in person
Jason Ward, for the respondents
Andrew Felker, for the Children’s Lawyer
Heard: November 17, 2015, December 1, 3 & 4, 2015, and May 27 & 30, 2016
Bale J.:
ENDORSEMENT
Introduction
[1] This is an application for the passing of the accounts of Christopher Mowry, estate trustee of the estate of Charles Groome. A joint notice of objection to accounts was filed by the respondents who are named beneficiaries, and the Children’s Lawyer who represents the unborn and unascertained beneficiaries of the estate.
Beneficiaries
[2] The will provided for the following gifts:
• $5,000 to be paid to each of the deceased’s four children;
• $50,000 to be held in trust, with the income of the trust to be used to fund a scholarship “to assist in the education of an individual or individuals under the age of 25 years, whose financial and other circumstances give rise to a need for assistance”; and
• the residue of the estate was to be held in trust for the education of the deceased’s issue.
Original Assets of the estate
[3] According to the accounts filed, the original assets of the estate totalled $573,820, with liabilities of $207,531. However, those liabilities include an amount of $70,000 said to be owed by the deceased to Mr. Mowry as of the date of death. As will be explained below, I don’t agree that the estate was liable to Mr. Mowry for that amount, with the result that the net value of the estate was $436,289. The primary asset of the estate was a life income fund in the amount of $408,214.33 (upon which income tax was payable).
The Objections
[4] The primary objections raised by the respondents are as follows:
• Mr. Mowry failed to pay the debts of the estate;
• he failed to diversify the deceased’s stock portfolio, resulting in significant losses;
• he purchased shares on margin which the objectors say was a risky investment strategy unsuitable for estate investments;
• he paid himself $70,000 which he says represented an inter vivos gift to him from the deceased;
• he failed to establish the trust funds provided for in the will; and
• in the end result, the estate is insolvent, and without funds to pay remaining debts, or establish either of the trust funds.
[5] The relief requested by the objectors is as follows:
• payment to the estate of $82,492, being one-half of the investment losses incurred as a result of Mr. Mowry’s failure to diversify the deceased’s portfolio;
• payment to the estate of $96,150, being the amount lost on the shares bought on margin;
• repayment to the estate of the $70,000 which Mr. Mowry paid to himself;
• repayment of a portion of the legal fees paid to the estate solicitors, in the amount $3,523;
• payment to the estate of $89,400, representing income tax penalties and interest for which the estate became liable, as a result of Mr. Mowry’s failure to file income tax returns, and to pay income tax owing, on a timely basis;
• repayment to the estate of the compensation of $45,575 taken by him;
• a declaration that Mr. Mowry’s resulting debt to the estate will not be released by an order of discharge, in the event of a subsequent bankruptcy; and
• removal of Mr. Mowry as estate trustee.
Investment standards and diversification
[6] Pursuant to section 27(1) of the Trustee Act, a trustee must, in investing trust property, exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments.
[7] Pursuant to section 27(6) of the Act, a trustee must diversify the investment of trust property to an extent that is appropriate to the requirements of the trust, and general economic and investment market conditions.
Analysis
Investment losses
[8] Following the deceased’s death, the margin account held by him at Raymond James was converted into an estate account, and the stocks which had been in his LIF account were transferred into the margin account. In order to effect the conversion and transfer, Mr. Mowry was required to sign a client agreement which, among other things, contained information as to his account objectives and risk tolerance as estate trustee.
[9] Mr. Mowry’s “account objectives” were stated to be 10% growth and 90% speculative; and his “risk tolerance” was stated to be 10% medium and 90% high. Clearly those percentages are unacceptable for an estate trustee.
[10] Mr. Mowry’s investment advisor, Denis Gagne, gave evidence that these percentages reflected the actual risk of the portfolio which was transferred into the margin account. While the risk of each of the component stocks was rated medium, the overall portfolio was high-risk as a result of overconcentration in the energy sector – in other words, because of a lack of diversification.
[11] In December 2014, the risk materialized – the market for energy stocks crashed, and the portfolio lost much of its value. The total losses to the trust on these stocks was $164,983.
[12] In defence, Mr. Mowry says that by keeping and renovating the deceased’s house, and by purchasing shares in a company by the name of “Yellow Media”, he did diversify the trust investments. He says that he should not be liable for losses incurred as a result of a single, unanticipated market event, and cites in support Hicks v. Hicks, 2003 CanLII 2132 (ON SC). He also says that certain provision of the will justify his actions. I disagree.
[13] Mr. Mowry’s plan was to renovate the house, and rent it out to provide income for the education trusts. However, as of the date of death, there was very little equity in the house – it was estimated that had it been sold within a reasonable period from the date of death, the net proceeds would have been plus or minus $5,000. In my view, the retention and renovation of the home for rental purposes was not a particularly wise investment for the education trust, but more importantly, it did not excuse the unacceptable risk of retaining the stock portfolio which was the major asset of the estate.
[14] I don’t see the purchase of the Yellow Media stocks as diversification, either. In June of 2014, Mr. Mowry purchased Yellow Media shares on margin for $48,329. Buying stocks on margin is an unacceptable risk for an estate trustee, and this purchase did nothing to mitigate the risk inherent in the energy stock portfolio. And to make matters worse, in July of 2014, Mr. Mowry purchased additional shares of Yellow Media for $50,006, this time, contrary to the advice of his investment advisor. Several weeks later, the stock was worthless, and the result of these misguided and unacceptable margin purchases was a loss to the estate of $96,150.
[15] The decision in Hicks does not support Mr. Mowry’s argument. In that case, the court said that the deceased’s wife should not be held responsible for the depletion of her spousal trust. She was the beneficiary of the trust, not the trustee, and the issue was whether the trust having been depleted, she was entitled to further support from the estate. The decision therefore cannot be taken to excuse a trustee who is responsible for significant market losses, as a result of a failure to diversify. The whole purpose of diversification is to avoid the losses which can occur in the event of such unanticipated market events.
[16] Section 27(9) of the Trustee Act provides that the provisions of section 27 do not authorize or require a trustee to act in a manner that is inconsistent with the terms of the trust.
[17] Paragraph 3 of the will permits the estate trustee to “retain any portion of my estate in the form in which it may be at my death for such length of time as he in his sole discretion shall deem advisable, and my trustee shall not be held responsible for any loss that may happen to my estate by reason of his so doing.” Paragraph 12 of the will provided that the estate trustee was authorized “to make any investments for my estate that my Trustee considers appropriate without being limited to those investments authorized by law for trustees and my Trustee shall not be liable for any loss that may happen to my estate as a result of any investments made by my Trustee in good faith.” However, these provisions do not override the applicant’s duty to exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments, or the duty to diversify the investments. The requirements of section 27 of the Trustee Act are not inconsistent with the terms of the will.
[18] In the result, I conclude that Mr. Mowry failed to exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments.
[19] The objectors ask that the estate be reimbursed for one-half of the losses incurred on the energy stocks. I see that as a fair request, given that even a properly diversified portfolio would have incurred losses on any energy stocks in the portfolio. No credit need be given for dividends received on the stocks since a diversified portfolio might well have earned equivalent (or greater) dividends.
$70,000 payment to Christopher Mowry
[20] Mr. Mowry’s evidence is that sometime following the date of death, he found a cheque which the deceased had left in Mowry’s office. The cheque was drawn by the deceased on his chequing account at the Bank of Nova Scotia, and was payable to Mowry in the amount of $70,000. The reference line on the cheque bore the notation “early inheritance gift”.
[21] At no time between the date of the cheque, and the date of death, were there sufficient funds in the bank account to cover the cheque. On the date of death, the balance in the account was $24,936.96. In addition, the deceased had $1,082.15 in a savings account at the same bank, and $83.36 in an account at the TD Bank. He had no way to cover the cheque – his investments, being all in a life income fund, were “locked in”.
[22] In July 2011, Mr. Mowry borrowed $165,000 from the Raymond James margin account, from which he paid himself $70,000. He was not entitled to so do.
[23] For a gift to be valid and enforceable, it must be perfected. The donor must have done everything necessary, and in his or her power, to effect the transfer of the property. An incomplete gift is nothing more than an intention to gift: Kavanagh v. Lajoie, 2014 ONCA 187, at para. 13. In the present case, the money said to be the subject of the gift simply didn’t exist.
[24] Strong v. Bird (1874), L.R. 18 Eq. 315 (Eng. Ch.) is cited for the principle that where a gift is complete in equity prior to the date of death, it may become perfected after the date of death where the donee is appointed estate trustee, and thereby obtains legal title to the property. However the principle is not applicable in this case. The money borrowed by Mr. Mowry to pay himself was not the money which the deceased intended to gift him with the original cheque (if there was in fact such an intention).
Refund of legal fees paid to estate solicitors
[25] The objectors ask that that Mr. Mowry repay $3,523 to the estate, being a portion of the legal fees of $10,523 paid by him to the solicitors for the estate. This is a reasonable request. It is based on the fact that the solicitors’ time dockets suggest that a portion of the fees paid by the estate were for work done in defending Mr. Mowry personally when he failed to account, and then obtained an order passing his accounts without serving the beneficiaries of the estate.
Estate trustees’ compensation
[26] The objectors argue that in the circumstances of this case, Mr. Mowry is not entitled to compensation, and that he should repay the estate the compensation of $45,576 which he took. However, in my view, in the absence of fraud, the estate should be put back into the position that it would have been in had Mr. Mowry fulfilled his fiduciary duties. If he or another estate trustee had done so, the estate would have been liable to pay compensation. In my view, reasonable compensation would have been $30,000, and Mr. Mowry will therefore be required to reimburse the estate the balance of $15,576.
Income tax penalties and interest
[27] The first thing that Mr. Mowry ought to have done having received probate was to file an income tax return, and sell sufficient stocks to pay the taxes owing. He did not, with the result that the estate became liable for penalties and interest totalling $89,400.22. He must therefore be held to liable to reimburse the estate for that amount.
Declaration under the Bankruptcy and Insolvency Act
[28] The objectors also requested that I order that the amounts for which I have found Mr. Mowry to be liable to the estate constitute a “debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity” within the meaning of subsection 178(1)(d) of the Bankruptcy and Insolvency Act, and that as a result, if Mr. Mowry was to become bankrupt, an order of discharge would not release him from liability. However, I am unable to find that the losses to the estate were a result of fraud, embezzlement, misappropriation or defalcation. He is guilty of a breach of trust, but not of a fraudulent breach of trust. While Mr. Mowry has been less than forthright since being asked to account, such was not the cause of the losses incurred. In my view, the actions of Mr. Mowry that caused the losses were not dishonest, just wrong-headed. After listening to Mr. Mowry talk for several days, my conclusion was that his problem was an inflated view of his business prowess, and a desire to be a hero, without regard for the risks involved, or the duties of an estate trustee.
[29] The court cannot be asked to declare that a certain legal result will follow from a hypothetical future event (the possible bankruptcy of a debtor). The question whether certain claims survive the discharge order is properly determined when a creditor, following the discharge of a bankrupt, seeks to enforce the pre-existing liability or judgment debt. If the debtor relies on his or her discharge as a basis for resisting enforcement of the pre-bankruptcy liability, the issue of the applicability of the exemptions contained in s. 178(1) should be determined at that time, based upon the established facts (including any previous declaration concerning the source of the liability) as well as the legal regime in force at that time: B2B Bank v. Batson, 2014 ONSC 6105, at para. 18.
Disposition
[30] In the result, there will be an order that Christopher Mowry pay the total sum of $357,140 to the estate of Charles Groome, made up as follows:
for losses incurred on the energy stocks: $82,492
for losses incurred with respect to Yellow Media: $96,150
reimbursement of excess compensation, $15,576
reimbursement of amount taken as a gift: $70,000
partial reimbursement of legal fees paid to estate solicitors: $3,523
for income tax penalties and interest: $89,400
[31] In addition, there will be an order that Christopher Mowry be removed as estate trustee, that he return his certificate of appointment to the court, and that a certificate of appointment be issued to Cullen Christopher Groome, upon the filing of the requisite application with the court.
[32] I will consider brief argument with respect to costs, provided that it is delivered to Judges’ Reception, Sixth Floor, Durham Region Courthouse, no later than January 31, 2017.
“Bale J.”
Released: December 14, 2016
CITATION: Mowry v. Groome, 2016 ONSC 7850
COURT FILE NO. 212/13 (Peterborough)
DATE: 20161214
ONTARIO
SUPERIOR COURT OF JUSTICE
Between:
Christopher Mowry, estate trustee of the estate of Charles William Groome
Applicant
– and –
Cullen Christopher Groome and Miles Manser Groome
Respondents
REASONS FOR JUDGMENT
Bale J.
Released: December 14, 2016