I have written extensively about the law of indemnity. In my paper and article I restated the law that estate trustees are entitled to be indemnified for expenses reasonably and properly incurred. However, the law also requires estate trustees to repay moneys taken from the estate that were not reasonable or proper. This is clear from both leading cases and statutory enactments. A recent Alberta case, Re Lindsay Estate, applies this law, but it also presents some new wrinkles that I believe merit a blog post.
The testator died on 20 April 2011. His will named Petronella Thomas, Gray Graves, and Susan Lindsay, the testator’s daughter, as his executors and trustees (“the Trustees”). They could act by a simple majority. The testator left the residue of his estate in separate testamentary trusts for his two children, Susan and Jeffrey, and his granddaughter, Georgia Harm, who is Susan’s daughter. Scotia Trust is the trustee of the testamentary trusts.
The will contained two clauses dealing with indemnity, the first of which is unusual:
- To carry out the terms of my Will, I give my Trustees the following powers in addition to any powers they may have at law or in equity, to be used in my Trustees’ discretion at any time
(p) To retain or employ lawyers, counsel, accountants, or other professional or qualified persons that my Trustees may require or consider advisable to render services or to give advice relating to matters in my estate or any trust thereof. My Trustees may act without consequential liability in accordance with the opinion of any professional or expert advice.
- My Trustees are not liable to my estate or to any beneficiary for any loss resulting from the exercise by my Trustees in good faith of any discretion given to my Trustees in my Will, and my Trustees may be indemnified from my estate without incurring personal liability.
In the course of the administration various disputes arose between the Trustees and between the Trustees and the beneficiaries, and a number of actions and other proceedings were commenced, including this estate action, as well as an application to remove Ms. Thomas and Mr. Graves as Trustees. The beneficiaries also commenced an action for damages against those two Trustees, alleging negligence, breach of fiduciary duties, and breach of trust. In consequence, over a period of time a large number of law firms were retained by the Trustees on behalf of the estate; by one or more of the Trustees on their own behalf, or purportedly on behalf of the estate; and by Susan Lindsay in her capacity as beneficiary. In the result, the estate has so far paid out large amounts for legal fees that total almost 10% of its net value.
In the estate action, Ms. Thomas brought an application for indemnity for legal expenses that she claimed were incurred in the administration of the estate. She stated that she had accumulated approximately $80,000 in legal expenses to date. She sought an order directing payment of the expenses already incurred, as well as payment of $25,000 for “future legal costs”. She argued that she was entitled to these moneys as an indemnity under the will and existing law. She refused to provide unredacted copies of the invoices for the past expenses and refused to answer questions from the beneficiaries and the other two Trustees about the matter, claiming solicitor-client privilege. She claimed that they were “reasonable legal fees” incurred in the administration of the estate. She was willing to provide the court with sealed unredacted invoices. Susan Lindsay and Scotia Trust, as well as the beneficiaries opposed the application.
Justice G.A. Campbell reviewed the case law, including the seminal case, Goodman Estate v. Geffen, which says:
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 . . .
The court also considered Brown v. Rigsby, in which the Ontario Court of Appeal applied Geffen, but qualified its principle by saying that an estate trustee will not be indemnified “if an estate trustee has acted unreasonably or in substance for his or her benefit, rather than for the benefit of the estate . . . ”
The court then considered and discussed my article in the Advocates Quarterly, which discusses both the case law and the Ontario equivalent of s. 25 of the Alberta Trustee Act, both of which insist that an estate trustee can only be indemnified for expenses reasonably and properly incurred and make provision for repayment of expenses taken that were not reasonable or proper. The court noted my opinion that estate trustees are not required to wait for court approval or beneficiary consent before taking moneys from the estate to indemnify themselves. However, the court also quoted the following paragraphs from my article:
It is obvious that the right to indemnity may be abused by trustees and estate trustees, especially if they take costs and expenses out of the trust fund or estate assets before they are permitted by the beneficiaries or authorized by the court to do so. But even if they pay these initially themselves, they may be refused indemnity subsequently by the courts or be required to repay the trust or estate. The principle set out above and codified in the statutes also recognizes this possibility. The expenses and costs must have been reasonably or properly incurred. If they were not, the trustee or estate trustee is not entitled to be indemnified for them.
This issue normally arises when the trustees or estate trustees apply to pass their accounts or when they are forced to do so by the beneficiaries. However, it may also arise on an application for advice and directions. The onus is on the estate trustee to prove that the expenses were proper.
In light of all this, the court found Ms. Thomas’ position “somewhat curious”. The court noted that on the evidence presented, it could not determine whether the expenses claimed by her were reasonably and properly incurred in the administration of the estate. The onus was on Ms. Thomas to prove their reasonableness and propriety and she failed to discharge the onus.
The court concluded that it was inappropriate to make that determination on the application. Rather, it should be addressed on a passing of accounts when all the evidence is made available to the court and the other parties. Moreover, although Ms. Thomas offered to provide sealed unredacted copies of the invoices for the past expenses, it would be impossible for the court to determine whether the expenses were reasonable at this point and, even if that were possible, it would be inappropriate to do so without input from the other parties.
Accordingly, the court dismissed the application, while subtly reminding Ms. Thomas that if she chooses to pay the expenses from the estate before a passing of accounts, she runs the risk of having to repay the amount taken if found to be unreasonable or improper.
So the decision is unexceptional and, with respect, is correct. The application was without foundation or justification in light of existing case law and statutory provisions.
However, I do have a concern about the estate action itself. The facts suggest that excessive legal expenses have been incurred and that raises the question how this matter got to this stage with seeming impunity. Because of the animosity between the various parties the beneficiaries would undoubtedly have refused to give their consent the Trustees’ legal expenses. But should the beneficiaries not have sought a passing of accounts before now and applied for an order for repayment of unreasonable expenses? The recent case, Craven v. Osidacz, clearly demonstrates that the court will deny indemnity to and order repayment of unreasonable legal expenses incurred by the estate trustee.
In addition, this surely was a case in which the estate trustees ought to have sought the court’s directions before incurring the excessive legal expenses. I suggested in my article that estate trustees are well advised to do so if unsure of the reasonableness of proposed expenses. If they fail to do so, they run the risk of having the court disallow the expenses and ordering their repayment. Lofchik J. also pointed out in Craven that if the trustees are concerned about whether particular legal or other expenses would be reasonable or meritorious, they should apply to the court for directions, citing Bank of Nova Scotia Trust v. Pressman for that proposition.
The case also serves as a warning to testators and their advisors to select their executors with great care and to ensure that they will be able to work together. While the provision that allowed the executors to act by simple majority is not wrong and, indeed, is often advisable to prevent a stalemate. The insertion of such a provision must be considered carefully after ensuring that the executors will be able to get along. By the same token, clauses 7(p) and 8 of the will, reproduced above, may have been unwise in the circumstances.
Finally, although the point was not raised because not relevant on this application, the suggestion that some of the Trustees employed counsel in proceedings on their own behalf raises another issue. The law is clear that if an estate trustee has acted for his own benefit, he will not be entitled to indemnity. On the other hand, an estate trustee is not disentitled from indemnification if the litigation was brought reasonably and was for the benefit of the estate, even though he benefited also in the result.