Sunday, February 17, 2008

Fales v. Canada Permanent Trust Co.

In your will, or in a trust agreement, you can appoint family members, friends or professional trustees. Whomever you appoint will have significant legal responsibilities to the beneficiaries.

Should all trustees be equally responsible for any mistakes they make? Should a trust company holding itself out as providing expert services and charging fees, share responsibility for any loss caused by failure to exercise reasonable care with a widow, with no experience or expertise in acting as a trustee?

These questions lie at the heart of a Supreme Court of Canada decision in the 1970s, called Fales v. Canada Permanent Trust Co. (1976), 70 D.L.R. (3d) 257 (SCC).

In his will, Kai Wohlleben had appointed his wife and Canada Permanent Trust Co. as trustees of a trust for his wife and children. The terms of the trust gave his wife the income from his estate, with the capital going to his children on her death. Shares of a business, Boyles Bros. Drilling Company Ltd., made up a significant part of the value of the estate.

After Mr. Wohlleben’s death, another company, Inspiration Limited, bought the shares of Boyles Bros. The trustees agreed to accept shares of Inspiration Limited as part of the purchase.

Inspiration Limited did not have a very good track record financially when it purchased the Boyles Bros. shares in December 1966. As a construction company, it was in a high risk industry. The company did not fair well in the following years. It had high debt, losses, and it defaulted on payments of loans. In 1970 Inspiration Limited went bankrupt.

Mr. and Mrs. Wohlleben’s children sued Canada Permanent Trust Co. They claimed among other things that Canada Permanent Trust Co. was negligent in holding onto the shares of Inspiration Limited. They alleged that Canada Permanent Trust Co. should have sold the shares when the shares were worth something.

The children did not sue their mother, who was also a trustee. But Canada Permanent Trust Co. made a claim against Mrs. Wohlleben, arguing that if Canada Permanent Trust Co. were legally responsible for the loss to the children, she should as a co-trustee contribute.

The case ended up in the Supreme Court of Canada.

The Supreme Court of Canada considered the duties of the trustees to beneficiaries. The Justice Dickson discussed the standard expected of a trustee. He said at pages 267-68 that “[t]raditionally, the standard of care and diligence required of a trustee in administering a trust is that of a man of ordinary prudence in managing his own affairs…and traditionally the standard has applied equally to professional and non-professional trustees.”

Mr. Justice Dickson agreed with the trial judge that the trustees fell short of their responsibilities to exercise ordinary prudence in holding onto the shares of Inspiration Limited for as long as they did.

But the Supreme Court of Canada held that Mrs. Wohlleben ought to be excused from any breach of her duties.

Section 98 (now s. 96) of the British Columbia Trustee Act gives the court discretion to excuse a trustee from personal liability if “has acted honestly and reasonably, and ought fairly to be excused for the breach of trust….”

Mr. Justice Dickson, in holding that Mrs. Wohlleben ought to be excused from personal liability considered Mrs. Wohlleben’s knowledge and experience. He wrote:

Mrs. Wohlleben acted honestly. After careful reading of the evidence and examination of the exhibits, I have concluded that she also acted reasonably. Her acts were not greatly less nor more than might be expected of one in her position. At the death of her husband, she was a housewife with four young children. She had been a school-teacher and she had taken a three months’ night school course on ‘How to Invest your Money.’ That would seem to have been the extent of her business exposure. She was no doubt an intelligent young woman of independent mind who from time to time consulted a broker and the lawyer for the estate, but her investment experience was minimal and she was without experience in the administration of trust estates. She tried to the best of her ability to keep herself informed but Canada Permanent failed to make known to her the contents of papers which were essential to informed opinion. She tried to respond but from less than complete information. She made all decisions which she was asked to make within the limits of her experience and knowledge, and I can not find that at any time she failed to listen to reason or that she responded irrationally or obdurately. In short, it would seem to me that this is the very sort of case for which s. 98 of the Trustee Act was intended and that Mrs. Wohlleben ought fairly to be excused for her breach of trust.

The Supreme Court of Canada upheld the trial judge’s award of about $250,000 for the children against Canada Permanent Trust Co. The award was based on the average value of the shares of Inspiration Limited during the period of time the trustees should have sold the shares. Mrs. Wohlleben was not required to pay any part of the award.

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