"Abdicating" Trustee Found Liable For Loss of Trust Monies

The Ontario Court of Appeal has held that a trustee, who abdicated her discretion and responsibility by improperly delegating those powers to two other trustees, was jointly and severally liable with the other trustees for trust funds that were wrongfully removed from the trust.  See Penman (Litigation Guardian of) v. Penman 2014 ONCA 83

Mary Lou McGillvray, appealed from the decision of Justice L.B. Roberts of the Ontario Superior Court of Justice to the Ontario Court of Appeal.  Justice Roberts had found Ms. McGillvray 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 that were wrongfully removed from a trust created by Ms. McGillvray’s late brother and her sister-in-law for the benefit of their grandchildren.  At all relevant times, Ms. McGillvray and her nephew Mark Penman were co-trustees of the trust.  Although he was not named as a co-trustee, Randal Penman was a trustee de son tort of the trust.  Ms. McGillvray was also one of the executors of her deceased brother’s estate.

Ms. McGillvray’s central submission on the original application was that she had acted honestly and reasonably, in good faith, and with the benefit of legal advice from her nephew, Randal Penman, an Alberta lawyer.  She maintained 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 loss of the trust funds. 

Justice Roberts disagreed.  She held that Ms. McGillvray had breached her obligations as a co-trustee of the trust, including her fiduciary obligations and made adverse findings as to Ms. McGillvray’s credibility and reliability of her testimony.  The finds included:

1. Ms. McGillvray had signed a director’s resolution authorizing Mark Penman to invest funds in the exercise of his unfettered discretion;
2. she failed to make any inquiries regarding the investment of the trust funds or Mark Penman’s dealings with the funds;
3. she was not misled by her nephews regarding the use and investment of the trust funds; and
4. she did not act reasonably in relation to her duties as a co-trustee of the trust and did not comply with her statutory duty of care as a trustee as set out under section 27(1) of the Trustee Act (the “Act”).  To the contrary she abdicated her duties entirely by improperly delegating all her powers, duties and authority as co-trustee to her two nephews.

The application judge found that it was “willful neglect and default” of a trustee to place trust funds in the hands of another (even a co-trustee) and allow it to remain there for years without any inquiry or any assurance that the trust is being properly administered.   

The Court of Appeal found that these findings of fact were available to the application judge on the evidentiary record before her.  Ms. McGillvray had failed to establish that the findings were tainted by "palpable and over-riding" error.  Accordingly, there was no basis for interference with the findings.

The Court of Appeal considered whether Ms. McGillvray could be relieved of liability by operation of law or under the terms of the trust indenture.  In this regard, it also upheld the decision of the application judge.  Justice Roberts held that McGillvray could not rely on the protection of section 35(1) of the 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 was not available to Ms. McGillvray because the alleged loss arose out of investment of the trust property and subsection 35(2) of the Act expressly provides that subsection (1) does not apply in those circumstances.  Moreover, the Court of Appeal held that Ms. McGillvray had not acted reasonably and therefore would be unable to rely on that section of the Act.

As to the trust indenture, the relevant section of it read that the trustees would not be responsible for the acts or defaults of each other or for any error in judgment or any act of omission or commission not amounting to actual fraud in the management and administration of the trust property.  Justice Roberts held that this paragraph did not apply to immunize Ms. McGillvray from personal liability because 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, the trustee assumes a duty to the beneficiaries of the trust.

Again the Court of Appeal agreed with the application judge and added that clauses of that kind will not protect the trustee when it is found that she improperly delegated her power or discretion.

In dismissing Ms. McGillvray’s appeal, the Court of Appeal commented that she remained free to pursue indemnification from Randal and Mark Penman for their wrongdoing in relation to the trust, should she be so advised.   

Regards,

Blair