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Costs or Damages: What is an Estate Trustee’s Best Remedy for Defending Meritless Litigation

This article was originally published by The Lawyer’s Daily (www.thelawyersdaily.ca), part of LexisNexis Canada Inc.

In McArthur v. McArthur and Harman 2019 ONSC 7232, a unanimous panel of the Divisional Court in Ontario held that the proper remedy for an estate trustee to seek to redress financial loss to an estate due to meritless litigation will in most cases be an award for costs, not a claim for damages.

Facts

Frank McArthur (the deceased) died on Aug. 23, 2013. He left a last will and testament dated Aug. 19, 2013.

The deceased had three siblings, the respondents: Marilyn McArthur (Marilyn) and Carolyn Harman (Carolyn), and the appellant, William McArthur (William).

The deceased named Marilyn and Carolyn as his estate trustees and beneficiaries under his will. William was not provided for in the will.

On Jan. 26, 2015, William filed a notice of objection to the issuance of a certificate of appointment of estate trustee with a will to his sisters. He then issued a statement of claim in respect to his objection.

Marilyn and Carolyn filed a statement of defence and counterclaim, which included a claim for damages equal to the amount of interest and penalties that the estate is liable to pay to Canada Revenue Agency due to their inability to liquidate estate assets to pay such liability as a result of William’s notice of objection.

Marilyn and Carolyn moved for summary judgment. In response to the motion, William withdrew his notice of objection and in essence abandoned his primary claim. On July 11, 2017, the motions judge granted summary judgment and awarded costs in favour of the respondents.

The motions judge ordered that Marilyn and Carolyn were entitled to recover damages from William in the amount of $26,475.44, which was equal to the amount owing by the estate to CRA for penalties and interest. In the alternative, William was to pay this amount to his sisters plus $10,000 for litigation costs for their successful litigation.

Decision on appeal

The appellant moved before the Divisional Court to set aside this order. The appeal was heard on June 19, 2019.

On Dec. 20, 2019, Justice David Corbett delivered reasons on behalf of a unanimous panel to set aside the counterclaim (and thus the award for damages) and to reduce the costs award made by the motions judge.

The reasons for this decision were twofold: (i) no cause of action was pleaded in the counterclaim whereby damages should have been awarded as payable; and (ii) “costs” in the context of estate litigation refers to legal costs and not estate administration costs.

Damages resulting from litigation

In regard to the award for damages made by the motions judge, the Divisional Court held that an award for damages resulting from losses incurred due to litigation can only be made in two circumstances: where made available by statute, regulation or common law principle, and; where the tort of abuse of civil process is pleaded and proved.

Justice Corbett eloquently explained in his reasons that commencing and pursuing litigation, whether unsuccessful and even if vexatious and frivolous, is not an actionable wrong whereby damages are payable unless one of the two exceptions apply. The court held that since the counterclaim attempted to make a claim for damages “resulting from the litigation commenced” without pleading one of the two exceptions listed above, it was to be dismissed for not disclosing a cause of action.

Costs awards

The Divisional Court affirmed that the motions judge correctly stated that a losing party may be liable for legal costs and that the “loser pays” principle was appropriately applied in these circumstances, since the courts have departed from the “old” approach where the estate paid for all parties’ legal costs. However, it was held that the motions judge did not properly consider what types of “costs” can be recovered by way of a costs award.

The Divisional Court reiterated that costs refers to litigation costs, not estate administration costs. Fees and disbursements included in litigation costs that may be awarded are set out in Tariff A to the Rules of Civil Procedure (the Rules). Consequential losses from litigation are not included in Tariff A. Although item 35 of Tariff A covers appropriate items not expressly enumerated in the Tariff, these disbursements must be “reasonably necessary for the conduct of the proceeding” to be included in a costs award.

Thus, the court held that consequential losses and expenses for the amount of $26,475.44 owing to CRA by the estate for penalties and interest which accrued throughout the course of this litigation were not appropriate disbursements incurred “for the conduct of the proceeding,” and therefore, not an appropriate amount for recovery in a costs award. As such, this part of the costs award was set aside.

After allowing the appeal, dismissing the counterclaim and setting aside part of the costs award made by the motions judge, the court awarded costs to the appellant.

Since the Divisional Court did not set aside the part of the costs award made by the motions judge for litigation costs with respect to the estate trustees’ successful defeat of William’s action, this amount was reduced by William’s successful appeal. In conclusion, William was ordered to pay a net amount of $6,000 to his sisters in costs for the filing of his notice of objection and failed claim.

Takeaways

1. An award for damages resulting from losses incurred due to litigation can only be made in two circumstances: (a) where made available by statute, regulation or common law principle; and (b) where the tort of abuse of civil process is pleaded and proved. The tests to meet for each of these circumstances are comprehensively set out in this decision.

2. If defending against meritless litigation, an estate trustee is best to seek an award for costs by making reference to s. 131 of the Courts of Justice Act, those factors set out in subrule 57.01(1) of the Rules and Tariff A thereto. Here is a link to a helpful resource on cost awards in estate litigation, which we publish on our firm’s website. 

3. If representing an estate trustee, consequential losses to estate assets due to prolonged litigation can be avoided by bringing an application for advice and directions under s. 14.05(3) and 75 of the Rules to seek and obtain orders for managing estate liabilities and protecting estate assets throughout the course of the litigation.

4. In the context of a will challenge, an application should be brought under s. 74 of the Rules and 28 of the Estates Act for the appointment of an estate trustee during litigation to manage estate liabilities and protect estate assets pending resolution of the litigation.

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