[Since I wrote this post, the British Columbia Court of Appeal has reversed this decision. See my post on the Court of Appeal decision here.]
It is common for trust agreements to provide for the appointment of successor trustees if the first trustee retires as a trustee, or is unable to act. Where the trust documents provide for successor trustees, it is critically important to follow the terms of the trust when a successor trustee takes over. Otherwise the successor trustee may not have authority to act as trustee, and may be liable to the beneficiaries of the trust for his or her actions.
This point is illustrated in a recent decision of the Mr. Justice Goepel of the Supreme Court of British Columbia, in Bronson v. Hewitt, 2010 BCSC 169.
In 1973, two Florida brothers, Harold Lewis and Eugene Lewis, acquired shares in a company, Big Nine Outfitters Ltd, to buy a guide and outfitting business in Northeastern British Columbia.
In 1978, they assigned their shares in the company to a family trust, the “Big Nine Trust” for the benefit of their children. The initial trustee was a guide named Gary Powell. The trust agreement provided that his wife, Olive Powell, and his sister Audrey Tompkins, were successor trustees if Gary Powell were no longer able or willing to act as trustee. If Olive Powell and Audrey Tompkins were unable or unwilling to act or continue to act as Trustee, the trust agreement provided that the two brothers, Eugene and Harold Lewis, would be the successor trustees.
In 1979, Eugene and Harold Lewis signed a letter in which they appointed their brother-in-law Howard Hewitt to act as a successor trustee if Eugene or Harold were unable or unwilling to act or continue to act as trustees.
Gary Powell died in a plane crash, and Olive Powell and Audrey Tompkins became the successor trustees. Olive Powell later resigned as a trustee, leaving Audrey Tompkins as the sole trustee.
In 2002 Audrey’s health was failing and she could not continue her duties as a trustee. By then the Lewis brothers had a falling out and were not speaking to each other. Harold Lewis was living in seclusion in Northern British Columbia, and Eugene Lewis did not want his brother to act as trustee.
Eugene renounced his right to become a successor trustee, and Audrey resigned. Howard Hewitt took over as trustee. Eugene Lewis played a significant role in arranging for Howard Hewitt’s appointment.
After becoming trustee, Mr. Hewitt determined that it was in the best interest of the trust to sell its interest in Big Nine Outfitters. He was concerned about changes in the market for big game hunting, and the business’s dependence on its guide, Barry Tompkins. He arranged the sale of Big Nine Trust’s 55.56 % interest in Big Nine Outfitters Ltd. to Mr. Tompkins for $888,889 based on the assumption that Big Nine Outfitters Ltd. had a value of $1.6 million.
The sale went ahead.
There was though at least one significant problem: Harold Lewis had never renounced his right to become a trustee on Audrey Tompkins’ resignation. Nor was he included in the negotiations to sell the shares.
Mr. Justice Goepel found that Harold Lewis was not aware of his right to be a trustee until after the shares were sold. He had not been involved in the business for years, and no longer had a copy of the trust agreement. Furthermore, Mr. Justice Goepel found that Eugene Lewis and Howard Hewitt concealed from Harold Lewis and his children his right to be a co-trustee.
Harold Lewis and his children opposed the sale. When they found out that Harold Lewis had been named as a successor trustee in the trust agreement, Harold Lewis, his three children, and Thomas Bronson, who had acquired an interest in Big Nine Trust, sued.
Mr. Justice Goepel held that Howard Hewitt did not have the authority to sell the shares. He acted in breach of trust when he acted as sole trustee, knowing that Harold Lewis was entitled to be a co-trustee and had not renounced.
Mr. Justice Goepel found that Mr. Hewitt acted reasonably and in good faith in deciding to sell the shares, but the sale was for an improvident price. Mr. Hewitt neither had an appraisal of the business, nor exposed it to the market before deciding on the price.
After considering the expert evidence on valuation, Mr. Justice Goepel found that the Big Nine Trust’s shares were worth between $1,375,665 and $1,542,345. He assessed damages owed to the plaintiffs for their 60% interest in Big Nine Trust at $350,000.
Mr. Justice Goepel considered whether or not to excuse Howard Hewitt for his breach of trust, either under the terms of the trust agreement or section 96 of the Trustee Act. The trust agreement provided that a trustee would not be liable for loss to the trust property if he acted in good faith, “except for loss caused by his own dishonesty, gross negligence or willful breach of trust.”
Section 96 of the Trustee Act provides that the court may relieve a trustee of liability for breach of trust if the trustee “has acted honestly and reasonably, and ought fairly to be excused for the breach of trust….”
Mr. Justice Goepel said that he might have excused Mr. Hewitt for making the sale at an improvident price if that had been the only breach of trust. But he held that by concealing Harold Lewis’ right to be a co-trustee, Mr. Hewitt had not acted in good faith. Accordingly, Mr. Justice Goepel did not excuse him for breach of trust.
The court held both Mr. Hewitt, for his breach of trust, and Eugene Lewis, for knowingly participating in the breach of trust jointly and severally liable to the plaintiff’s for the damages of $350,000 arising from the sale of the Big Nine Outfitters Ltd. shares. This means the plaintiffs may collect their damages from either Mr. Hewitt or Eugene Lewis (or part of the damages from each).