Saturday, June 30, 2007

Estate Litigation Costs: A Case Study

As I previously wrote, Mrs. Cheryl-Lynn Steernberg successfully made a claim for a larger share of her husband's estate under the Wills Variation Act, RSBC 1996, c. 490. After a trial, Madam Justice Martinson increased Mrs. Steernberg's share from 10 % to 15% of the estate. You can read the decision here.

On June 28, 2007, in Steernberg v. Steernberg, 2007 BCSC 953, Madam Justice Martinson released her reasons for judgment on the issue of costs. The general rule in British Columbia is that the successful party receives some costs from the unsuccessful party. The costs generally cover only a portion of the successful party's actual legal expenses. But, as with most rules, there are exceptions.

Madam Justice Martinson considered a couple of significant issues. First, she considered whether the executor of Peter Steernberg's will was entitled to pay his legal fees out of the estate for defending against Mrs. Steernberg's claim. Secondly, she considered whether to award costs against Mrs. Steernberg because before the trial the defendants had offered to settle with Mrs. Steernberg for 20% of the net value of the estate (the assets less liabilities and expenses).

The court was clear that the executor was not entitled to pay his legal fees out of the estate for defending against Mrs. Steernberg's claim. The executor's duty in a Wills Variation Act action is to remain neutral. In this case, the executor was also a beneficiary. As a beneficiary, he was entitled to defend against the claim, but at his own expense.

Madam Justice Martinson distinguished Wills Variation Act cases from those cases in which the executor is defending the validity of the will. For example, the executor may be entitled to have his or her legal expenses paid out of the estate if someone is claiming that the testator did not have the capacity to make a valid will. But, in Wills Variation Act cases, the validity of the will is not challenged. The executor has no need to defend the will, and has a limited role of providing the court with information about the estate.

The court ordered the executor to repay the funds he took out of the estate to pay his legal bills in opposing Mrs. Steernberg's claim.

Madam Justice Martinson also considered the effect of the defendants' offer to settle on the basis that Mrs. Steernberg would receive 20% of the net value of the estate.

Rule 37 of the Supreme Court Rules is a rule designed to facilitate settlements of lawsuits. If the defendant(s) offer to settle with a plaintiff in compliance with Rule 37, and the plaintiff is successful, but does not get a better result at trial than what the plaintiff would have received under the offer, the plaintiff will receive court costs only in respect of those steps taken before the date of the offer. The plaintiff must then pay costs to the defendant(s) in respect of those steps taken after the date of the offer. The theory is that the plaintiff should have accepted the offer to settle, instead of going to trial. Accordingly, there can be financial consequences visited on a plaintiff who does not accept a reasonable offer. (There are similar rules to facilitate offers from plaintiffs to defendants.)

The defendants argued that, because they offered a higher percentage of the net estate than the percentage Mrs. Steernberg received at trial, she should receive costs to the date of the offer, and then be required to pay costs for all of the steps taken after the date of the offer.

Madam Justice Martinson rejected the defendants' position. She found that the defendants' offer did not comply with Rule 37.

First, the offer did not come from all of the defendants in their personal capacities. The executor made the offer as executor, together with the other beneficiaries. The executor did not make the offer as a beneficiary. Accordingly, the offer was not made on behalf of all of those beneficially entitled to the estate.

Secondly, the offer was based on the net value of the estate after the executor had taken funds for his legal fees for defending against Mrs. Steernberg's claim. Accordingly, the 20% offered was 20% of a lesser amount than the net value of the estate after repayment of the legal fees improperly taken. Accordingly, at the time the offer was made, Mrs. Steernberg could not properly assess the offer.

Thirdly—and most significantly for estate litigation practice—Madam Justice Martinson held that an offer of a percentage of the net value of an estate is not sufficiently certain to fall within Rule 37. The value of an estate fluctuates over time. To comply with Rule 37, the offer must be for a certain amount.

Madam Justice Martinson awarded Mrs. Steernberg her costs, to be paid by the defendants personally (not out of the estate).

Above all, this case offers a cautionary lessen in the economics of estate litigation. It appears to me from the reasons that the estate will be worth roughly $1.3 million after the executor repays the legal fees improperly paid out of the estate. The court increased Mrs. Steernberg's share by 5% (10% to 15%), which is an increase of roughly $65,000. But, her legal fees were $235,000, which is $170,000 more than my estimate of her benefit. Although she will also get costs from the defendants, I doubt that those costs will be anything near $170,000. Sadly, although Mrs. Steernberg won her case, she will come out behind financially.

If I have added the numbers up correctly, it appears from the reasons for judgment that the combined legal expenses of the defendants were approximately $300,000 (a small portion of which might have been incurred in estate administration unrelated to the law suit). The court reduced the defendants' shares of the estate, and they are required to reimburse Mrs. Steernberg for a portion of her legal expenses.

The parties spent in the neighbourhood of a half-million dollars on this lawsuit. This is why it is usually a good idea to consider mediation at a relative early stage of the proceedings.

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