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Trusts - Passing of Accounts. Benjamin Cochrane Trust (Re)
In Benjamin Cochrane Trust (Re) (Ont CA, 2023) the Court of Appeal considered the issue of trustees, whom it is failed to account properly, advanced an equitable set-off (and quantum meruit) 'defence':(2) Did the trial judge err in failing to turn her mind to issues of quantum meruit and equitable set-off?
(a) The Parties’ Positions
[48] The appellants took the position at trial that if the trial judge found that they had not properly accounted for all trust funds, they should be entitled to compensation for services that they had provided to their son, services which fell into seven categories: case management, academic support, supervision, bookkeeping, management of banking activities, driving lessons and surety supervision. In other words, the appellants sought a set-off for amounts they said they could have charged the trust but did not, as against any amount they could not properly account for and had to repay.[2]
[49] On appeal, the appellants maintain that the trial judge erred by failing to turn her mind to the doctrines of quantum meruit and equitable set-off. Had she done so, she would have assigned a value to the services they provided as trustees over so many years, and the value would have been set-off against any amount owing. The appellants say that the trial judge erred by instead focussing on the fact that the “unpaid disbursements”, representing the services they provided, were not paid from the trust funds. As a result of her flawed decision, the trust has been unjustly enriched by the valuable services provided by the appellants for the respondent’s benefit.
[50] In response, the respondent contends that the appellants did not seriously pursue a quantum meruit claim before the trial judge. Indeed, they never mentioned quantum meruit or unjust enrichment in their closing submissions. While they mentioned “set-off”, the respondent says this was in relation to trustee compensation, legal expenses, or on the basis of the notional “loans” that they allegedly provided to the trust; it was not on the basis of unjust enrichment. In any event, any quantum meruit claim would have been doomed to fail for a number of reasons, including that the appellants, in their capacity as parents, likely intended to provide the services gratuitously.
[51] As I will explain, I reject the appellants’ submissions on this point.
(b) Discussion
[52] In my view, the trial judge did not err or “los[e] sight of the question to be determined”, as the appellants contend. Rather, she directly confronted how the appellants framed their argument. The appellants advanced a position that: (1) they were seeking payment of the “unpaid disbursements” for their services as a set-off if (and only if) there was a “shortfall” in their administration of the trust, and (2) the set-off could be accomplished either by allowing the “unpaid disbursements” or through an award of trustee compensation. I see no reason to interfere with her treatment of those issues.
[53] It is not surprising that the trial judge did not use the terms quantum meruit or unjust enrichment in her reasons. The appellants are able to point to one, and only one, brief reference to the term quantum meruit in the written materials that were before the trial judge (in their Reply to Fresh as Amended Notice of Objection to Accounts). They have pointed to no references to the term “unjust enrichment”.
[54] As for oral submissions, the terms are similarly absent. Instead, the appellants focussed upon what they characterized as their claim for “set-off”. The following passage from the appellants’ counsel’s opening submissions provides a window into what the appellants were actually seeking at trial and how they were asking the trial judge to deal with the issue of compensation and “unpaid disbursements” for services they said they had rendered:So again, if we go to the end of the accounts, to the schedule title loan from [the appellants] starting at page 183 of the accounts – I’m not asking Your Honour to flip there now, I’m just saying it’s there – there is an annual table for the shortfalls, there is a monthly table for the shortfalls and the key is that over the 17 years the total loan amount reflecting uncompensated services provided by [the appellants] at the rates and time recommended in the cost of care report total together $245,000 to $245,618.11. Those are at 20 year old rates without interest. I stress they do not want any money repaid to them. The accounts also contain a compensation calculation. [The appellants] do not want any compensation either. We have made this clear in correspondence. These are simply set offs in the event this court agrees with any of [the respondent’s] objections. [The appellants] simply do not want to pay [the respondent] anything. They are not [out] of pocket a huge amount notionally for their time and they are not claiming compensation [except] as a set off to any objections this court may, may [sic] agree with of [the respondent’s] but they do want their legal costs paid. [Emphasis added.] [55] This position – that they sought set-off (either on the basis of the “loans” representing uncompensated services or by way of trustee compensation) if and only if they would otherwise be ordered to repay any amount – was repeated in the appellants’ closing arguments. Notably, this repeated framing of the arguments again contained no reference to quantum meruit or unjust enrichment terminology:[COUNSEL]: … okay so, I mean [the appellants] don’t want any money. The efforts that they went to are reflected in the accounts. They wouldn’t want a penny if the court accepts that they don’t owe [the respondent] any money. They don’t want a penny of compensation. So the entire question of whether they are double claiming, the answer is, if the court doesn’t accept that it’s proper to include as disbursements, which is really set-offs, you know we are really setting off — if the court doesn’t accept that it’s proper to include those amounts [for the work they did] as disbursements, then … they would want that via compensation whether it’s the percentages being increased radically or I think more appropriate would be the court awarding a special fee for that work.
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[COUNSEL]: ... If Your Honour finds the [appellants] did all this work, then, did all this work and it’s fair that they be compensated, or not compensated, but it’s fair that they use that as a set-off for any amounts that they can’t, they can’t prove, any disbursements that they can’t prove, then these are alternative ways of, of creating that, of, of, not creating, these are alternative ways of, of, of arriving at that set-off. Either in the accounts and disbursements, or in the compensation calculation, and I think the simplest way to do it is to use the correct numbers, use the usual percentages and then apply a special fee for compensation equating to all the work they did which is set-off against what they can’t prove. [Emphasis added.] [56] This argument was fully understood and addressed by the trial judge.
[57] For example, at the outset of her reasons, she acknowledged that the appellants’ position was that if they were to be ordered to repay any amount to the respondent, that repayment order should be set-off in recognition of the valuable unpaid services they had provided. In particular, she said:[The appellants] do not have receipts or documentation to support most of the disbursements in the Statement of Accounts. Nevertheless, they argue that they have fully accounted for the $418,672.25 received by the trust. [The appellants] also ask that any order I make requiring them to repay the trust be offset by the amount they are entitled to receive as trustee compensation.
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[The appellants] testified that they only included their unpaid services as disbursements in the account to offset any expenses that are disallowed and to reduce the chance they will be required to repay the trust. [Emphasis added.] [58] These passages (and more) clearly demonstrate that the trial judge understood that the appellants were asking for set-off either by way of the hundreds of “unpaid disbursements” included in the statement of accounts or by way of their claim for trustee compensation. As she noted later in her reasons, they claimed “unpaid disbursements” for services allegedly rendered totaling $218,670.08 and trustee compensation in the amount of $131,038.42. The trustee compensation sought as “set-off” constituted around 30 percent of the total trust funds the appellants had administered.
[59] The trial judge disallowed the “unpaid disbursements” relating to services the appellants said they had provided to the respondent. As was her prerogative, the trial judge concluded that these “unpaid disbursements” were inaccurate and misleading:The Statement of Accounts contains hundreds of disbursements for services that [the appellants] purportedly provided to [the respondent] or the trust. There are disbursements for case management services, bookkeeping services, banking services, academic support and general supervision. The Statement of Accounts shows all of these disbursements as having been paid to [the appellants]. [The appellants] submitted signed receipts for most of these disbursements that appear to confirm they were paid for their services….
[The appellants] both testified that they were not actually paid by the trust for their services. [The mother] testified there was never enough money in the trust to pay her and [the father] for the services they provided as trustees. [The appellants] testified that they only included their unpaid services as disbursements in the account to offset any expenses that are disallowed and to reduce the chance they will be required to repay the trust. These “unpaid disbursements” should not have been included in the Statement of Accounts. They distort and distract from the truth of what happened with [the respondent’s] money.
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The unpaid disbursements and the fictitious loans [created to reflect the unpaid disbursements] render the Statement of Accounts inaccurate and misleading. They also make it difficult to decipher what actually happened to the cash that [the appellants] withdrew from the trust account each month. [Emphasis added.] [60] In light of these findings, which are owed deference, I see no basis to interfere with her disallowance of the fictional disbursements, which were matched by fictional loans. In the trial judge’s words, these were “unpaid disbursements included to offset any repayment order” as opposed to amounts “paid by the trust”.
[61] It was only once she had determined the “truth of what happened” – or what disbursements to allow or disallow – that set-off came into play, since set-off was, as the appellants argued, only required if there was a shortfall. Consistent with the appellants’ submissions, after reviewing the disbursements claimed in the statement of accounts, the trial judge went on to consider whether the appellants were entitled to set-off in discussing trustee compensation.
[62] The appellants claimed they were entitled to $131,038.42 in trustee compensation, of which almost $100,000 was for “care and management” and the balance was for “receipts and disbursements”. The trial judge found that the parents could not receive “care and management” fees seeing as they did nothing to invest or manage the trust funds, other than withdrawing cash and putting it into a safe. As for the “receipts and disbursements”, the trial judge concluded that even there, the appellants had miscalculated what they said was owed.
[63] Notably, the trial judge considered the time that the appellants spent administering the trust, but explained that she was not prepared to grant them a significant award of trustee compensation due to their failure to fulfill their primary duty to account for the trust funds they received. In the end, she only allowed for a “modest” set-off of $15,000 in trustee compensation.
[64] There is no basis upon which to interfere with the trial judge’s finding that only a modest set-off was appropriate in the circumstances. As she noted, the appellants had failed to fulfil their duty as trustees to keep proper accounts. Further, they acknowledged that they “never expected [their son] or the trust to repay the loans.” These findings of fact, to which deference is owed, undermine the appellants’ suggestion that the trust was unjustly enriched by the services they provided to their son. At the end of the day, the appellants’ submission is really an attack on the trial judge’s findings of fact.
[65] In conclusion, the trial judge was alive to the appellants’ position that, if there was a shortfall, there should be a recognition of the value of the services they provided by means of a set-off. Not only was she alive to their position but she dealt with it head on. Her findings on this point are entitled to deference. . Benjamin Cochrane Trust (Re)
In Benjamin Cochrane Trust (Re) (Ont CA, 2023) the Court of Appeal considered an appeal from a disputed passing of accounts by the parent trustees. These quotes give an illustration of a 'passing of accounts' proceeding, here emanating from a personal injury settlement:[3] The passing of accounts turned into a full-blown 14-day trial where the trial judge was faced with a daunting task. The appellants admitted to having administered the trust in cash and had little documentary evidence to show how the trust funds were spent over the 17-year period covered by their statement of accounts. The respondent disputed every single one of the more than 2,000 disbursements claimed.
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[7] There are five main issues raised on appeal:
1. Unpaid disbursements: Did the trial judge err in disallowing reimbursement of properly incurred expenses that were paid by the appellants personally, when the reimbursement of out-of-pocket expenses is permitted under s. 23.1(1)(b) of the Trustee Act, R.S.O. 1990, c. T.23 (the “Trustee Act”)?
2. Quantum meruit/equitable set-off: Did the trial judge err in failing to turn her mind to issues of quantum meruit and equitable set-off?
3. Legal fees: Did the trial judge err in denying the appellants indemnity for their legal fees?
4. Prejudgment interest: Did the trial judge err in her calculation of prejudgment interest?
5. Costs: Did the trial judge err in ordering the appellants to pay costs to the respondent?
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(3) Passing of Accounts
[16] The trial judge was faced with an enormous task. The statement of accounts spanned 17 years and included 2,208 disbursements. The respondent challenged each one, as well as alleging misconduct.
[17] The laborious task of assessing each disbursement was complicated by a lack of supporting documentation. It was further complicated by the fact that many of the entries in the statement of accounts were misleading. The appellants fabricated “receipts” for services that they said were provided by third parties. This meant that the trial judge had to separate legitimate receipts from false ones. In addition, hundreds of disbursements shown as being paid from trust funds were actually never paid. These “unpaid disbursements” were for what the appellants described as “services” they had rendered as trustees and for which they had received no compensation because there were insufficient funds in the trust. Including disbursements that were never paid from the trust, the total disbursements in the statement of accounts came to $664,293.36, an amount that is actually $245,618.11 more than the trust even received during the relevant timeframe.
[18] In an effort to account for the apparent overspending, the appellants showed in their statement of accounts that they had loaned the trust the excess amount over the years. The trial judge described this accounting exercise as “fictitious”, since none of it was documented and the appellants acknowledged in their testimony that they never expected the respondent or the trust to repay those loans. Counsel for the appellants (different counsel than on appeal) made it clear that they were not seeking the repayment of the loans, but only included them in the statement of accounts “as a set off” should the appellants be found to owe the respondent any money.
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B. DECISION BELOW
[20] The trial judge dealt squarely with the issue of onus, explaining that it was for the appellants as the trustees to prove how the trust funds were spent. As she noted, both the appellants’ credibility and reliability, which were challenged, were central issues in the case.
[21] The trial judge also explained her methodology in terms of how she approached her task. She found that the “enormity of the account” made it impossible to address each disbursement individually. Accordingly, she attempted to group all the disbursements, including the “unpaid disbursements”, into categories. For each category, she first decided whether the expense was incurred “by the trust” or not. If it was not incurred “by the trust”, then she disallowed the expense. If it was incurred “by the trust”, she then decided whether the appellants had established that the expense was for the amount claimed and that the expense was properly incurred in accordance with the terms of the trust.
[22] The trial judge found that while the appellants did what they thought was best for the respondent as parents, they were misguided in how they administered the trust and failed to discharge their primary duty as trustees to account for the trust funds they received. Despite that failure, the trial judge was not satisfied that they had deliberately misused or misappropriated trust funds. She also found that while they had fabricated evidence, it was not done to conceal wrongdoing but rather because they had not understood their obligations as trustees and were making efforts to account for what they had done with the trust money over many years.
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[115] In my view, the respondent’s submission misunderstands the nature of the passing of accounts process. Just because a trustee has committed a breach of trust, it does not mean that a court need refuse to pass the accounts writ large. For example, in Simone v. Cheifetz (2000), 2000 CanLII 16978 (ON CA), 36 E.T.R. (2d) 297 (Ont. C.A.), this court upheld the judgment on the passing of accounts (subject to one small accounting error), even though the trustee was in breach of his fiduciary duties. . Benjamin Cochrane Trust (Re)
In Benjamin Cochrane Trust (Re) (Ont CA, 2023) the Court of Appeal considered the issue of a trustee's disbursements, here in a passing of accounts appeal:[26] The appellants maintain that the trial judge erred in disallowing a number of legitimate disbursements because she did not understand that trustees may pay a trust expense personally and then recover that amount from the trust – a principle codified in s. 23.1(1)(b) of the Trustee Act. ...
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(i) Section 23.1 of the Trustee Act
[28] Section 23.1(1) of the Trustee Act reads as follows:23.1 (1) A trustee who is of the opinion that an expense would be properly incurred in carrying out the trust may,
(a) pay the expense directly from the trust property; or
(b) pay the expense personally and recover a corresponding amount from the trust property. [Emphasis added.] [29] Section 23.1(2) provides that the court may then disallow the payment or recovery if the expense was not properly incurred in administering the trust:(2) The Superior Court of Justice may afterwards disallow the payment or recovery if it is of the opinion that the expense was not properly incurred in carrying out the trust. (ii) The Trial Judge did not Ignore or Misapply s. 23.1 in Disallowing the Expenses
[30] In advancing their argument that the trial judge ignored or misapplied s. 23.1 of the Trustee Act, the appellants place particular emphasis on para. 27 of her reasons:Given the enormity of the account, it is not feasible to address each disbursement individually. To the extent possible, I have addressed the disbursements in categories. For each category, I first decided whether the expense was incurred by the trust. In other words, was the disbursement paid by the trust or is it an unpaid disbursement included to offset any repayment order? If I found the disbursement was not paid by the trust, I have disallowed it. My task is to assess the propriety of expenses paid by the trust: Steven Thompson, at para. 36. My task is not to assess whether an expense would have been approved had it been paid by the trust. If I found that a disbursement was paid by the trust, I then decided whether Bill and Carol have established that the expense was for the amount claimed and that it was incurred for Benjamin's benefit in accordance with the terms of the trust. [Emphasis added.] [31] The appellants argue that this passage demonstrates that the trial judge failed to appreciate that trustees can personally pay for a trust expense and then obtain reimbursement from the trust. In other words, she was wrong to disallow the 12 groups of expenses merely because they were not “paid by the trust”.
[32] I do not agree that this passage, read in context, reflects a misunderstanding of s. 23.1 of the Trustee Act.
[33] The trial judge references s. 23.1 at the outset of her reasons:As the trustees, [the appellants] were entitled to spend the trust money on goods and services for [the respondent’s] benefit: Truste[e] Act, R.S.O. 1990, c. T.23, s. 23.1. However, [the appellants] must now account for how [the respondent’s] trust money was spent. The issue for me to decide is whether [the appellants] have established that the disbursements from the trust were incurred in accordance with the terms of the trust [citations omitted]. If I find that a disbursement was inappropriately charged to the trust or is inconsistent with the terms of the trust, I can disallow it. I can also order [the appellants] to repay the trust for disallowed disbursements or unaccounted for funds: Trustee Act, s. 23.1(2) [citation omitted]. [Emphasis added.] [34] The fact that this is the only reference to s. 23.1 in the reasons is not surprising. The provision was not the subject of much discussion at trial. Indeed, in closing argument, the appellants’ counsel made only a fleeting reference to it in his reply submissions.
[35] Despite the fact that the trial judge made no further explicit reference to s. 23.1, she did in several instances approve disbursements in situations where the appellants had paid expenses personally and then been reimbursed from the trust, which is consistent with s. 23.1(1)(b). For example, the trial judge noted that “[the mother] testified that [the appellants] bought [the respondent] anything he needed to work at Maple Creek and reimbursed themselves from the trust.” The trial judge accepted that those were appropriate trust expenses and allowed them.
[36] In contrast, she did not allow disbursements that were never paid or reimbursed from trust funds. The appellants testified that they paid various third-party expenses out of their own funds when there were insufficient funds in the trust. Similarly, when there were insufficient funds, they did not reimburse themselves. As the trial judge recognized, these were “loving parents” who “at every turn … did what they thought was best for [their son].”
[37] In the statement of accounts, the appellants accounted for some of the disbursements that were never paid from trust funds as “loans”, which the trial judge found to be fictitious. The loans were fictious because there was no contemporaneous documentation and the appellants admitted that they never expected their son or the trust to repay the loans. The loans were only included after-the-fact “to ensure the trust receipts match[ed] the artificially inflated disbursements” so as to prevent the appellants from having to pay anything to the respondent in case of a shortfall.
[38] With this context in mind, I understand the trial judge to be making several points in the impugned passage.
[39] First, she had to determine whether an expense was incurred at all. As discussed, that task was made all the more challenging by the lack of documentation and falsified receipts, and by the misleading nature of the statement of accounts. Looking at the trial judge’s findings related to the 12 groups of expenses at issue, it is evident that the trial judge had doubts in some cases whether the expenses had been incurred at all.
[40] Second, the trial judge not only had to determine whether the expenses had been incurred, but also whether they were incurred by the appellants in their role as trustees. As she recognized at the outset of her reasons, “[t]his [was] a difficult case because [the appellants] are both [the respondent’s] parents and the trustees of his trust.” In using the phrase “by the trust” in the impugned passage, I understand the trial judge to be distinguishing between amounts the appellants paid as trustees (“by the trust”) and other amounts they paid in their role as loving parents. If they decided to expend more than the trust ever received out of love for their son, that was a personal choice.
[41] Third, in the impugned passage, the trial judge specifically references “unpaid disbursement[s] included to offset any repayment order”. The vast majority of expenses included to offset any repayment order were “unpaid disbursements” for services the appellants said they had provided, which were not disbursements at all. These had to be weeded out in order for the trial judge to determine what portion of the trust funds the appellants could actually account for. I will return to these “unpaid disbursements” below.
[42] Fourth, I understand her statement that “[her] task [wa]s not to assess whether an expense would have been approved had it been paid by the trust” as a refusal to deal in conjecture. This was a case where the appellants, who had all of the serious responsibilities of trustees, had put together a questionable after-the-fact attempt to explain what had happened over 17 years, all in an effort to avoid paying the respondent back any money. In my view, the trial judge was simply and quite reasonably saying that she was not prepared to engage in speculation or hypotheticals in determining whether any money was owed.
[43] Therefore, on my reading, para. 27 does not reflect a misapprehension of s. 23.1 of the Trustee Act. Read in context, para. 27 of her reasons reflects the trial judge’s framing of the issues in the context of this particular case.
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