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Even Dragons and Sharks Must Maintain Fiduciary Accounts   

Based on his lawyer’s advice Robert Herjavec created an estate freeze in 1996. Mr. Herjavec was named sole trustee with unfettered discretion as to the disposition of the trust corpus among the beneficiaries. Mr. Herjavec was not a beneficiary of the trust (Family Trust). His wife and children were. The year following year, Mr. Herjavec transferred 75% of his company shares into the Family Trust.

In 2000 he sold his company to AT&T for $31 million. When the transaction closed about $21 million of the proceeds were paid to the Family Trust to be administered according to the trust’s terms.  Mr. Herjavec received roughly $8 million personally.

Thereafter Mr. Herjavec became a well-known tech entrepreneur success story. He wrote books, delivered speeches and became a television celebrity as a result of his appearances on Dragon’s Den, Shark’s Tank and Dancing with the Stars. He also established another highly successful new tech company (THG).

Only when he and his wife separated in July 2014 did it become apparent to his wife and children that the Family Trust had virtually no assets remaining and had been in that position since 2008.

His wife demanded Mr. Herjavec provide an accounting of the use of the trust funds.  This led to Mr. Herjavec as the trustee ultimately moving to pass the Family Trust’s accounts.

A lengthy trial occurred in the fall of 2018. The passing of accounts proceeding and the family law proceeding were heard together by Justice Mesbur (Plese v. Herjavec, 2018 ONSC 7749). In her summary of the evidence Her Honour notes:

“Mr. Herjavec testified that even though $21 million was trust property, he viewed both the money in the trust and his portion of the sale proceeds as one pot of money.

Mr. Herjavec is not a beneficiary of the Family Trust.  Even though he is not, he admits that he provided himself with some benefits from the trust.  Even though as Trustee he owed a fiduciary duty to the trust and its beneficiaries, he did not properly fulfil those duties.  He kept no proper records of the trust.  He provided himself with some benefits from the trust.  He provided benefits from the trust to THG.  He comingled trust money with other money, including accounts of THG.  Now, some twenty-two years after the trust was established the court must ascertain how the trust funds were used.  This task is complicated by the fact that many banking records (both of THG and the parties’ joint bank account) no longer exist.                                                                                 

As a result, Mr. Herjavec retained an accounting expert to assist in tracing funds in and out of the trust and determining what, if any, benefits the beneficiaries received either directly or indirectly from the trust corpus.  This exercise then led to the application to pass the trust’s accounts.  The passing of accounts requires the court either to approve both the income and capital receipts and disbursements of the trust or not.  This requires an analysis of the extent to which the beneficiaries received all the benefit of the trust funds, or whether non-beneficiaries have done so.” [40]

This task was enormous and obviously extremely costly:

“….. was qualified as an expert in both accounting and forensics.  He testified that the initial tracing of the trust funds took at least two full time staff, whom he supervised, himself and a co-op student.  After being retained in May 2016, it was a full time job for two people for three months. ……. he spent 50 to 60% of his own time on the assignment as well.  …. his team reviewed ten years’ worth of bank statements.  There were eleven bank accounts or investment accounts to review, spanning the period from 2002 until valuation day in 2014……. the   task also required him to review all the transactions in the (existing business) shareholder account.  That account had about 3,700 transactions to review.” [44-45]

Ultimately Justice Mesbur found that the trust beneficiaries had received the benefit of the trust funds:

“I therefore conclude the beneficiaries have effectively received the benefit of all the trust funds.  The accounts have properly accounted for both the capital and income receipts, and the capital and income disbursements of the Family Trust.” [64]

 There is no question Mr. Herjavec breached his fiduciary duties in comingling trust funds with both his own funds and those of THG.  Although there is no question there was a breach of fiduciary duty, it was an innocent breach.  The beneficiaries acknowledge Mr. Herjavec did not really understand that he was not a beneficiary and could not benefit himself from the trust.  Even though Mr. Herjavec breached his fiduciary duties, the trust and beneficiaries have suffered no loss, other than the cost of the exercise of passing the trust’s accounts.” [77]

However, Mr. Herjavec was required to bear all of the costs of the trust and the beneficiaries personally:

“As the Court of Appeal pointed out in Cahill v Cahill [6] the trustee bears the burden of showing he or she acted honestly, reasonably and ought fairly to be excused.  The court must consider the Trustee’s breach in light of all the circumstances.  These will include whether the breach was technical, or a minor error in judgment, whether the Trustee was paid, and whether the Trustee is a professional.

[80]                   Dealing with the last two factors first, Mr. Herjavec was neither paid, nor is he a professional Trustee.  That being said, his breaches were more than technical.  Since Mr. Herjavec had no idea what his obligations were as Trustee, it is hard to quantify his errors in judgment as minor or otherwise.  Nevertheless, overall the beneficiaries have suffered no loss as a result of Mr. Herjavec’s actions.

[81]                   That being said, Mr. Herjavec’s breach of fiduciary duty and cavalier attitude to the trust corpus caused the entire application regarding the trust.  Had he conducted himself appropriately, kept proper records and routinely passed the trust’s accounts there would have been no need for the application at all.  As a result, the trust should bear none of its own costs.  Similarly, Ms. Plese and the other opposing beneficiaries should not have to bear any of the trust’s costs or their own in relation to the passing of accounts.  The appropriate remedy is for Mr. Herjavec to bear all the costs of both the trust and the beneficiaries personally.  An order shall issue to that effect.”

Even celebrity trustees have fiduciary duties and must keep and maintain proper accounts. A helpful resource is WEL Partners on Fiduciary Accounting, 2014, 2nd Edition 2016. Contact Dana Hogan in our office at (416) 355-3253 if you are interested in obtaining a hard copy.

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