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Derivative Actions in Estate Litigation

I began this blog as a comment on Mischke v Mischke Estate.[1] However, I soon realized that the case has broader implications, so I shall explore those first and then review the case.

Derivative actions are common enough in corporate law, but I believe that they are not that common in estate litigation. However, they are a convenient way for a beneficiary to bring an action on behalf of an estate that the executor does not wish to take on. They are sometimes referred to as representative actions.

There are various situations in which a beneficiary might wish to bring such an action. The executor may have concluded that the action is not cost-effective and thus not worth pursuing. Or she may be in a conflict of interest or be at fault herself, and therefore does not wish to initiate proceedings.

In a derivative action the beneficiary brings an action not in her own name, but in the name of the executor and so the executor must be named as a defendant. In other words, the action is brought by and on behalf of the estate. It can be brought only with leave of the court.

Although derivative actions are not common in estate litigation, they do happen and have long been recognized in the common law for both estates and trusts. As Lord Nichols of Birkenhead noted in Royal Brunei Airlines Sdn Bhd v Tan,[2] in the context of obligations professional advisors owe to trustees:

… for the most part [professionals] owe the trustees a duty to exercise reasonable skill and care. When that is so, the rights flowing from that duty form part of the trust property. As such, they can be enforced by the beneficiaries if the trustees are unable or unwilling to do so’.

Roberts v Gill & Co[3] is instructive in this regard. In it, Lord Collins reviewed a number of cases that recognized the principle and that dated back to the eighteenth century. Lord Collins discussed the early cases and referred with approval to the comments by Lord Templeman in Hayim v City Bank NA,[4] in which the Privy Council had engaged in a similar review, and which affirmed the principle laid down in the early cases that a beneficiary can bring a derivative action. Lord Templeman said:[5]

… when a trustee commits a breach of trust or is involved in a conflict of interest and duty or in other exceptional circumstances a beneficiary may be allowed to sue a third party in the place of the trustee. But a beneficiary allowed to take proceedings cannot be in a better position than a trustee carrying out his duties in a proper manner.

Further, after reviewing other cases, he said:[6]

These authorities demonstrate that a beneficiary has no cause of action against a third party save in special circumstances which embrace a failure, excusable or inexcusable, by the trustees in the performance of the duty owed by the trustees to the beneficiary to protect the trust estate or to protect the interests of the beneficiary in the trust estate.

Lord Collins also reproduced the following quotation from American sources to indicate that the same principle prevails there:[7]

It is the trustee rather than the beneficiary who is entitled to maintain actions against third parties who commit torts with respect to the trust property or fail to pay debts held in trust. If the trustee improperly fails to bring such an action, the beneficiaries can compel the trustee by a suit in equity to do so, and in order to settle the whole matter in a single suit, they can join the third party as a co-defendant.

Clearly, to bring a derivative action the beneficiary under the will (or under a trust, or an intestate heir) must satisfy the court that there are special (or exceptional circumstances that justify the derivative action.

In the Roberts case the courts held that the beneficiary failed to establish special circumstances. Two brothers, John and Mark, were beneficiaries under their grandmother’s will. The will provided that if John paid the inheritance tax on the estate, he would inherit one farm and Mark would inherit another. If John failed to satisfy the condition, both properties would fall into residue, and it would be split three ways among them and their aunt. John was named administrator. He paid only part of the tax but transferred the farm to himself and sold the property. John has used two firms of solicitors to advise him. Mark then sued both firms for negligence, that caused a loss to him. However, it became clear that the solicitors owed a duty of care only to the estate and not to Mark. Hence, Mark sought to amend his claim, so that he could pursue it on behalf of the estate. Unfortunately, Mark’s proposed amendment was barred by limitations, but the Supreme Court held that even if it was not, he failed to adduce special circumstances justifying the derivative claim.

British Columbia has codified the ability to bring a derivative action. It is contained in s. 151 of the Wills, Estates and Succession Act.[8] The section provides:

151 (0.1) In this section, “specified person” means a beneficiary, an intestate successor or a person who may commence a proceeding claiming the benefit of Division 6 [Variation of Wills] of Part 4 [Wills].

151 (1) Despite section 136 [effect of representation grant], a specified person may, with leave of the court, commence proceedings in the name of the specified person and on behalf of the estate of the deceased person

(a) to recover property or to enforce a right, duty, or obligation owed to the deceased person that could be recovered or enforced by the personal representative, or

(b) to obtain damages for breach of a right, duty or obligation owed to the deceased person.

151(3) The court may grant leave under this section if

(a) the court determines the specified person seeking leave

(i) has made reasonable efforts to cause the personal representative to commence or defend the proceeding,

(ii) has given notice of the application for leave to

(A) the personal representative,

(B) any other specified persons, and

(C) any additional person the court directs that notice is to be given, and

(iii) is acting in good faith, and

(b) it appears to the court that it is necessary or expedient for the protection of the estate or the interests of a specified person for the proceeding to be brought or defended.

Thus, an applicant has to satisfy the following five criteria to obtain leave to bring a derivative action under s. 151:[9]

  1. the applicant must be a “specified person” within the meaning of the section;
  2. reasonable efforts must have been made to have the executor commence the proceedings;
  3. notice must have been given to the required persons;
  4. the applicant must be acting in good faith; and,
  5. the court must be satisfied it is necessary or expedient for the proceedings to be brought.

There have been several applications under s. 151, most of which are referred to in Mischke v Mischke Estate.[10] However, Terezakis v Ekins[11] was not and I should like to review it briefly before I discuss the Mischke case because the two cases reach different results on the facts, and therefore the contrasting results can assist in understanding how the courts approach such applications.

Terezakis involved the following facts: A mother died in 2016. Her will directed that the residue of her estate be distributed equally between her three surviving children, a daughter, Angela, and two sons, Tony and John. The mother held title to one property. She held another property in joint tenancy with Angela, whom she named her executor. The mother had contributed $100,000 to its down payment and Angela claimed that this was a dowry gift from her mother but that she herself had paid all expenses in connection with the property since its purchase in 1993. Angela transferred this property into her own name after her mother died. Tony issued a notice of civil claim in 2017 in which he claimed that the mother had given Angela significant assets and money during her lifetime on the understanding that these would be held in trust for the benefit of all the surviving children. Then he brought an application under s. 151 to bring a derivative action to assert his claim that the property was held on resulting trust for the estate and to amend his notice of civil claim accordingly. John  took Angela’s side. Angela acknowledged that Tony had made reasonable efforts to cause her to begin the proceeding and that he had given notice of the application to her. The court held also that Tony was acting in good faith, in a way that would benefit the estate and not solely himself. Further, it held that held that Angela was clearly in a conflict of interest and therefore it was necessary that the proceedings be brought. The court declined to consider whether Tony’s claims disclosed an arguable case, since not all the evidence was before the court and this application was not the proper occasion to adjudicate the action or amended action. Significantly the court ordered that the action should be styled as: ‘Angela Hrysoula Terezakis, in her capacity as executrix of the Estate of Aikaterini Terezakis v. Angela Hrysoula Terezakis’. Thus, it is clear that the action should be brought in the name of the executrix on behalf of the estate. The court also ordered that Tony would have carriage of the action and gave orders about examinations for discovery.[12]

The facts in Mischke are not dissimilar to those in Terezakis. A mother died in 2018. Her will named her three children, Lothar, Georgia, and Yvonne, as well as her three grandchildren, her beneficiaries. It named Lothar as her executor. Further, in 2008 the mother had granted powers of attorney to Lothar and Georgia. The mother lived in her house in West Vancouver with Yvonne until she broke her hip in 2004. Then she lived with Georgia and her family for four months but returned to live in her house with Yvonne thereafter. In 2007, the mother left her house again to live with Georgia and decided to sell her house. She served a notice on Yvonne to vacate the house. She lived with Georgia for the next four years. During this time she developed Alzheimer’s and, as her attorney, Lothar made monthly payments to Georgia from the mother’s bank account to cover her care. In 2012, the mother was placed in a care home and moved later to another, where she lived until her death.

Lothar brought an application for probate in 2018, which was granted, and in 2020 he filed an application to pass his accounts. Yvonne opposed this application. Then she brought a s. 151 application for leave to bring a derivative action in her name on behalf of the mother’s estate against Lothar and Georgia. In her proposed notice of civil claim, she sought declarations that Lothar was in breach of trust, for orders requiring Lothar and Georgia to provide a full accounting of their actions as attorneys,[13] and for an order requiring Lothar to repay expenses he incurred as attorney that were not authorized by the court. Yvonne advanced a number of grounds to justify the relief sought, including the monthly payments made to Georgia for her mother’s care, failure to account for use of the mother’s funds, Lothar’s sale of the mother’s house at an undervalue, Lothar’s implicit approval of his own accounts, and legal expenses Lothar incurred improperly on behalf of the estate. The parties agreed that the application for the passing of accounts would be adjourned until after the outcome of the s. 151 application.

The court agreed that the first and third conditions of s. 151, listed above, had been satisfied: Yvonne was a ‘specified person’ as a beneficiary, and she had given notice to the executor and the other beneficiaries of her claim. The court held that Yvonne had made reasonable efforts to have Lothar bring the proposed proceeding, particularly considering that Lothar was in a conflict of interest. Yvonne had also satisfied the onus on her to show that she was acting in good faith in that her concern with the manner in which Lothar and Georgia exercised their powers of attorney was genuine and not motivated simply by animosity toward her siblings.

However, the court concluded that it was not necessary or expedient for the protection of the estate, for Yvonne herself, or for any of the other beneficiaries, to bring the proposed proceeding. Much of Yvonne’s claim amounted to a response to Lothar’s application to pass his accounts as distinct from a proposal to commence new litigation and could be addressed in that application. Further, the court found that the estate had no arguable claim against Lothar and Georgia in relation to the payments made for the mother’s care or in relation to alleged withdrawals from the mother’s investments. As regards both issues, Yvonne’s evidence amounted to no more than a bare expression of concern. Nor did her evidence as regards the alleged under-value sale of the house contain any evidence of the actual value of the house. In any event, the sale was largely directed by the mother herself. As the court noted, even though the applicant does not have all evidence at hand, she must adduce at least some reasonably cogent evidence tending to show that her claim has merit. Yvonne failed to establish that her claims disclosed an arguable case and therefore her proposed action was not necessary or expedient for the protection of the estate. Accordingly, the court dismissed the application.

In many ways s. 151 is beneficial. For one thing, it brings derivative actions in estate litigation out of the closet and makes them readily accessible to litigants wanting to bring proceedings against an estate or against attorneys. A derivative action is useful, for example when the executor has caused a loss to the estate, since a beneficiary cannot sue him directly for the loss, although she may be able to sue him for any personal losses he may have caused. It may also be useful if the executor refuses to pursue a debt due to the estate, although the beneficiary could ask the executor to assign the debt to her, just as a trustee in bankruptcy can assign a debt to a creditor who wants to pursue a debt that the trustee has decided not to pursue.[14] However, an executor is likely to demand to be indemnified when he assigns a debt to a beneficiary.

But on the other hand, I wonder whether the statutory provision is necessary. We can do virtually all the things that a derivative action allows us to do in other ways.  For example, we can:

  • bring an action against the executor for breach of trust;
  • bring an action against the executor for negligence in the discharge of her duties;
  • bring proceedings to remove a trustee or executor and replace her with another person when that will benefit the estate and the beneficiaries;
  • bring an action against an executor who holds title to property jointly with her deceased parent, which raises the presumption of resulting trust, and thereby casts the onus of rebutting the presumption on the executor; and
  • bring an application for an order requiring an attorney or an executor to pass her accounts.

Moreover, courts have power to dismiss an action summarily for lack of any reasonably cogent evidence to support a claim. Similarly, they have power to reject an application to require an accounting. That being the case, do we really need a codification of derivative actions in estate litigation? Does it add an unnecessary level of proceedings to estate litigation?

However, if the action is for the benefit of the estate, the plaintiff will have to obtain leave to bring it, and it must be brought in the executor’s name, since it is the executor’s right and obligation to bring the action.

[1]    2021 BCSC 1404, 60 ETR 4th 237.

[2]    [1995] 2 AC 378 at 391.

[3]    [2010] UKSC 22, [2011] 1 AC 240.

[4]        [1987] AC 730 (PC).

[5]    Ibid at 747.

[6]    Ibid at 748.

[7]    Restatement (Second) Trusts, 1959, §282(2); Scott and Ascher, Trusts, 5th ed 1995, chapter 28, §28.1

[8]    SBC 2009, c 13, amended SBC 2019, c 4, s 8(a), which added subs (0.1). The section is not unlike the derivative action provisions in corporations statutes, see, e.g., Business Corporations Act, RSO 1990, c B.16, ss 246-247; Canada Business Corporations Act, RSC 1985, c. C-44, ss 239-240.

[9]    The list derives from Malacek v Leiren, 2021 BCSC 1052 at para 40, per Giaschi J.

[10]   Footnote 1, supra.

[11]   2018 BCSC 249.

[12]   For a similar case in which the court also granted leave to bring a derivative action under s. 151 but which involved an intestacy, see Werner v. McLean, 2016 BCSC 1510, 19 ETR 4th 304.

[13]   In para 16 the court unfortunately calls them ‘powers of attorney’. With respect, that is the equivalent of calling them pieces of paper, because that is what powers of attorney are. A power of attorney is a document in which the grantor appoints one or more persons as his attorney(s).

[14]   Bankruptcy and Insolvency Act, RSC 1985, c B-3, s. 38

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