1. Introduction
Pfisterer Estate v Hoepfinger-Pfisterer[1] is a recent Ontario case in which the court removed a trustee for breach of trust. But the facts are somewhat unusual and that makes for interesting reading.
2. Facts
The testator, Wolfgang Pfisterer, was a German resident who had a large German estate. He had also acquired valuable farm property in the Windsor Essex area. Consequently, he made two wills, one for his German Estate and one for his Ontario Estate. Wolfgang died in Germany in 2014. The case is concerned only with the latter. The Ontario Will appointed Tom Smith as the Ontario Trustee and named the testator’s four children, Doris Hoepfinger-Pfisterer (‘Doris’) and her three siblings, Roland, Sabine, and Wilfred his beneficiaries. The Ontario Estate consisted of: (1) liquid assets in cash worth $9,709.16 and joint investment accounts in the names of Wolfgang and Doris worth $1,512,138 (collectively the ‘Joint Accounts’); and (2) the Ontario farmland worth $4,989,500.
Clause 2 of the Ontario Will referred to the executor and trustee as the testator’s trustee, ‘provided that’ he ‘will confer’ with Doris ‘prior to making any decisions with respect to my estate’. Clause 3(a) gave the Ontario Trustee ‘uncontrolled discretion’ in realizing the Ontario Estate, with power to sell, call in, and convert into money any part of the estate, at such time or times, in such manner, and upon such terms, and either for cash or credit as the Trustee may decide. Clause 3(b) gave the Ontario Trustee the same discretion to pay the debts of the Ontario Estate, testamentary expenses, and inheritance and succession duties or taxes. Finally, clause 3(c) provided that the Ontario Trustee had ‘absolute discretion’ to pay the residue to the beneficiaries living at the date of distribution per stirpes.
In 2015 the Ontario Trustee sent a form to the beneficiaries seeking approval for his interim taking of compensation annually. The lawyer who drafted the will advised him that he could do this without conferring with Doris and without court approval. He did in fact take interim compensation. Also in 2015 the Ontario Trustee asked Doris to transfer some $1.1 million from the Joint Accounts to pay capital gains tax, probate fees, and related expenses.
In 2017 the Ontario Trustee took out a $500,000 mortgage on the farmland to pay estate expenses, including interim compensation for himself in some instances. Again, he did not confer with Doris.
In 2019 Doris demanded that the Joint Accounts moneys be repaid to her and in 2020 brought an application in which she claimed that the Joint Accounts were not part of the Ontario Estate and that she was the sole owner of the moneys in the Joint Accounts by right of survivorship. The Ontario Trustee and the other beneficiaries opposed her claim.
After Wolfgang’s death, the beneficiaries carried on lengthy litigation in Germany about the German Estate among themselves. Because of this litigation, the Ontario Trustee believed that it would be in the best interests of the beneficiaries that the Ontario farmland be subdivided into four parcels and that to each beneficiary be given title to one parcel. To that end the Ontario Trustee spent time and expense to create a plan of subdivision and eventually the municipal administration recommended that the plan be approved. However, the beneficiaries were unable to reach a consensus in part because of Doris’ joint accounts application, and therefore the plan was never implemented.
The Ontario Trustee came to the conclusion that there was little hope that the beneficiaries would ever come to an agreement and therefore he believed that the only realistic option was to sell the Ontario farmland. A mediation between the parties was unsuccessful. The Ontario Trustee had been informed that the beneficiaries opposed any sale of the farmland. Nevertheless, he listed the farmland for sale and entered into an agreement of purchase and sale (‘APS’) in June 2021. Acting on legal advice from the lawyer who drafted the will, he did not consult with Doris about the sale.
The beneficiaries’ litigation was largely resolved in 2020 and the beneficiaries informed the Ontario Trustee of that. In July 2021 the beneficiaries entered into an agreement that resolved their differences. It also led to a consensus on issues related to the Ontario Estate.
An additional problem was that the Ontario Trustee and the beneficiaries were provided conflicting and varying advice about the amount of capital gains tax. This included advice that subdividing the farmland and transferring it to the beneficiaries would trigger an immediate capital gains tax liability. That advice was incorrect as Doris discovered when she retained her own accountant in 2021, who advised her that the capital gains tax would be rolled over and deferred until the death of the beneficiaries.
The Ontario Trustee brought an application for an order approving the APS, directing that upon payment of the balance of the purchase price the lands vest in the purchaser, and directing the Ontario Trustee to take all steps necessary to complete the transaction. Doris brought a counter application for an order denying the approval and vesting orders and removing Tom Smith as Ontario Trustee and replacing him. The applications were heard together.
3. The Decision
Justice Brian D Dubé identified several issues, which I discuss under the following headings.
3.1 The Conferring Provision
The court quickly disposed of the suggestion that, as worded, the provision required the Ontario Trustee to confer with Doris about every decision, no matter how insignificant, and held that, as a matter of common sense he did not have to confer with Doris about minor or inconsequential decisions.
The court regarded the predominant position of the conferring provision in clause 2 of the Will to be significant. It meant that the Ontario Trustee must confer with Doris before he exercised his ‘uncontrolled’ or ‘absolute’ discretion in making decisions about the administration of the Ontario Estate (para 62). Therefore, the Ontario Trustee had to confer with Doris before accepting the offer and signing the APS. He had no reasonable justification for disregarding the plain and unambiguous meaning of the provision. Without conferring with her, he had no discretion to accept the offer and sign the APS (para 79). His failure to confer with Doris constituted a breach of trust (para 81).
3.2 Interim Compensation and Registering the Mortgage
The court noted that taking interim compensation is a common practice but, citing Wall v Shaw,[2] as a general rule an executor and a trustee may only do so if: (1) all persons who have a vested or contingent interest (and are sui juris) agree; (2) the court approves; or (3) the will permits it.
Unfortunately, the reasons speak of ‘pre-taking’ compensation. It is a term in common use, but it is a non sequitur. It suggests that the trustee is taking compensation before actually taking it.[3] Section 65 of the Uniform Trustee Act[4] allows a trustee, subject to certain conditions, to take interim compensation without court approval,[5] and this is therefore a preferable term. In my opinion the enactment of such a provision is desirable. At any rate the court took the view that the Ontario Trustee failed to follow the three prerequistes in Wall v Shaw but more important, he disregarded the terms of the Will by failing to confer with Doris each time he took interim compensation. He also breached the terms of the Will by registering the mortgage and incurring debts without conferring with Doris. Therefore in this respect he also committed a breach of trust (paras 92-93).
3.3 Inaccurate Capital Gains Information
In the court’s opinion, the Ontario Trustee was entitled to rely on what he believed was sound advice by Wolfgang’s accountant and indeed he was required to do so before conferring with Doris. Since experienced lawyers for both parties initially failed to make further inquiries about capital gains liabilities, it was unreasonable the Ontario Trustee to have done so.
3.4 Courts of Justice Act, Section 100, and Equitable Relief
Section 100 of the Courts of Justice Act[6] empowers a court to order that an interest in real or personal property vest in any person. The vesting power is rooted in equity[7] and therefore the party who seeks a vesting order must come to court with clean hands. The Ontario Trustee did not do so. While he was given discretion to sell the farmlands even if the beneficiaries opposed the sale, he could only exercise this discretion if he first conferred with Doris, which he failed to do. That failure was ‘unreasonable, inexcusable, and fatal to his claim for equitable relief’. Consequently, the Ontario Trustee was not entitled to the vesting order he sought (paras 109-111).
4. Conclusion
Accordingly, his Honour dismissed the Ontario Trustee’s application. He also granted Doris’ counter application in part by refusing to approve the APS, and, on consent, removing the Ontario Trustee and appointing a replacement.
His Honour did not provide authority for exercising the power to remove the Ontario Trustee and appointing a replacement. In fact, there are two sources for this authority. The first is s 5 of the Trustee Act.[8] It empowers the court make an order to appoint a new trustee either in substitution for or in addition to any existing trustees. Thus, under this power the court cannot simply remove a trustee but must appoint a substitute. The other source of authority to remove a trustee is the court’s inherent jurisdiction and under that jurisdiction it is not required to appoint a substitute. Nonetheless, a court will not simply leave the trust without a trustee but will always appoint a substitute in that case.[9]
In Letterstedt v Broers,[10] a case that has been consistently followed in Canada, the Privy Council held that the test for removing a trustee is whether it is necessary for the welfare of the beneficiaries. A breach of trust certainly falls in that category, unless it is a mere technical breach of trust that was done for the best interests of the beneficiaries.[11] In any event, the breach of trust in this case was sufficiently serious to merit removal. Perhaps the disharmony and conflict between the Ontario Trustee and the beneficiaries might have served as an additional ground.
—
[1] 2022 ONSC 4117.
[2] 2019 ONCA 929 (reconstituted as a panel of the Divisional Court when hearing the appeal), paras 43-44.
[3] Perhaps this usage derives from the term ‘pre-planning’ which is a favourite of the funeral industry. It is also a non sequitur. The prefix pre- means ‘before’. So what the term is really saying that you are planning your funeral before you are actually planning it!
[4] This Act was promulgated by the Uniform Law Conference of Canada in 2012. It can be found online at http://www.ulcc.ca/images/stories/2012_pdfs_eng/2012ulcc0028.pdf. The term “interim compensation” is not actually used in s. 65 but is used in the section’s heading. For a discussion of the Act, see Albert H. Oosterhoff, ‘Trust Law Reform: The Uniform Trustee Act’ (2014), 34 E.T.P.J. 329. The two statutes that have enacted the Uniform Act, have also adopted the term ‘interim compensation’. See Trustees Act, SNB 2015, c 21, s 64; Trustee Act, SA 2022, c T-8.1, s 70.
[5] In fact, the Ontario Law Reform Commission recommended that trustees be allowed to take interim compensation almost 40 years ago. See Report on the Law of Trusts (Toronto: Ministry of the Attorney General, 1984), pp. 255-61.
[6] RSO 1990, c C.43.
[7] Third Eye Capital Corporation v Resources Dianor Inc/Dianor Resources Inc, 2019 ONCA 508, para 34.
[8] RSO 1990, c T.23.
[9] NorthWest Value Partners Inc v Bell (2010), 56 ETR 3d 1 (Ont CA).
[10] (1884), LR 9 App Cas 371 (PC).
[11] See Waters’ Law of Trusts in Canada, 5th ed by Donovan WM Waters, Mark R Gillen, and Lionel D Smith (Toronto: Thomson Reuters, 2021), p 950.
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Written by: Albert Oosterhoff
Posted on: October 13, 2022
Categories: Commentary
1. Introduction
Pfisterer Estate v Hoepfinger-Pfisterer[1] is a recent Ontario case in which the court removed a trustee for breach of trust. But the facts are somewhat unusual and that makes for interesting reading.
2. Facts
The testator, Wolfgang Pfisterer, was a German resident who had a large German estate. He had also acquired valuable farm property in the Windsor Essex area. Consequently, he made two wills, one for his German Estate and one for his Ontario Estate. Wolfgang died in Germany in 2014. The case is concerned only with the latter. The Ontario Will appointed Tom Smith as the Ontario Trustee and named the testator’s four children, Doris Hoepfinger-Pfisterer (‘Doris’) and her three siblings, Roland, Sabine, and Wilfred his beneficiaries. The Ontario Estate consisted of: (1) liquid assets in cash worth $9,709.16 and joint investment accounts in the names of Wolfgang and Doris worth $1,512,138 (collectively the ‘Joint Accounts’); and (2) the Ontario farmland worth $4,989,500.
Clause 2 of the Ontario Will referred to the executor and trustee as the testator’s trustee, ‘provided that’ he ‘will confer’ with Doris ‘prior to making any decisions with respect to my estate’. Clause 3(a) gave the Ontario Trustee ‘uncontrolled discretion’ in realizing the Ontario Estate, with power to sell, call in, and convert into money any part of the estate, at such time or times, in such manner, and upon such terms, and either for cash or credit as the Trustee may decide. Clause 3(b) gave the Ontario Trustee the same discretion to pay the debts of the Ontario Estate, testamentary expenses, and inheritance and succession duties or taxes. Finally, clause 3(c) provided that the Ontario Trustee had ‘absolute discretion’ to pay the residue to the beneficiaries living at the date of distribution per stirpes.
In 2015 the Ontario Trustee sent a form to the beneficiaries seeking approval for his interim taking of compensation annually. The lawyer who drafted the will advised him that he could do this without conferring with Doris and without court approval. He did in fact take interim compensation. Also in 2015 the Ontario Trustee asked Doris to transfer some $1.1 million from the Joint Accounts to pay capital gains tax, probate fees, and related expenses.
In 2017 the Ontario Trustee took out a $500,000 mortgage on the farmland to pay estate expenses, including interim compensation for himself in some instances. Again, he did not confer with Doris.
In 2019 Doris demanded that the Joint Accounts moneys be repaid to her and in 2020 brought an application in which she claimed that the Joint Accounts were not part of the Ontario Estate and that she was the sole owner of the moneys in the Joint Accounts by right of survivorship. The Ontario Trustee and the other beneficiaries opposed her claim.
After Wolfgang’s death, the beneficiaries carried on lengthy litigation in Germany about the German Estate among themselves. Because of this litigation, the Ontario Trustee believed that it would be in the best interests of the beneficiaries that the Ontario farmland be subdivided into four parcels and that to each beneficiary be given title to one parcel. To that end the Ontario Trustee spent time and expense to create a plan of subdivision and eventually the municipal administration recommended that the plan be approved. However, the beneficiaries were unable to reach a consensus in part because of Doris’ joint accounts application, and therefore the plan was never implemented.
The Ontario Trustee came to the conclusion that there was little hope that the beneficiaries would ever come to an agreement and therefore he believed that the only realistic option was to sell the Ontario farmland. A mediation between the parties was unsuccessful. The Ontario Trustee had been informed that the beneficiaries opposed any sale of the farmland. Nevertheless, he listed the farmland for sale and entered into an agreement of purchase and sale (‘APS’) in June 2021. Acting on legal advice from the lawyer who drafted the will, he did not consult with Doris about the sale.
The beneficiaries’ litigation was largely resolved in 2020 and the beneficiaries informed the Ontario Trustee of that. In July 2021 the beneficiaries entered into an agreement that resolved their differences. It also led to a consensus on issues related to the Ontario Estate.
An additional problem was that the Ontario Trustee and the beneficiaries were provided conflicting and varying advice about the amount of capital gains tax. This included advice that subdividing the farmland and transferring it to the beneficiaries would trigger an immediate capital gains tax liability. That advice was incorrect as Doris discovered when she retained her own accountant in 2021, who advised her that the capital gains tax would be rolled over and deferred until the death of the beneficiaries.
The Ontario Trustee brought an application for an order approving the APS, directing that upon payment of the balance of the purchase price the lands vest in the purchaser, and directing the Ontario Trustee to take all steps necessary to complete the transaction. Doris brought a counter application for an order denying the approval and vesting orders and removing Tom Smith as Ontario Trustee and replacing him. The applications were heard together.
3. The Decision
Justice Brian D Dubé identified several issues, which I discuss under the following headings.
3.1 The Conferring Provision
The court quickly disposed of the suggestion that, as worded, the provision required the Ontario Trustee to confer with Doris about every decision, no matter how insignificant, and held that, as a matter of common sense he did not have to confer with Doris about minor or inconsequential decisions.
The court regarded the predominant position of the conferring provision in clause 2 of the Will to be significant. It meant that the Ontario Trustee must confer with Doris before he exercised his ‘uncontrolled’ or ‘absolute’ discretion in making decisions about the administration of the Ontario Estate (para 62). Therefore, the Ontario Trustee had to confer with Doris before accepting the offer and signing the APS. He had no reasonable justification for disregarding the plain and unambiguous meaning of the provision. Without conferring with her, he had no discretion to accept the offer and sign the APS (para 79). His failure to confer with Doris constituted a breach of trust (para 81).
3.2 Interim Compensation and Registering the Mortgage
The court noted that taking interim compensation is a common practice but, citing Wall v Shaw,[2] as a general rule an executor and a trustee may only do so if: (1) all persons who have a vested or contingent interest (and are sui juris) agree; (2) the court approves; or (3) the will permits it.
Unfortunately, the reasons speak of ‘pre-taking’ compensation. It is a term in common use, but it is a non sequitur. It suggests that the trustee is taking compensation before actually taking it.[3] Section 65 of the Uniform Trustee Act[4] allows a trustee, subject to certain conditions, to take interim compensation without court approval,[5] and this is therefore a preferable term. In my opinion the enactment of such a provision is desirable. At any rate the court took the view that the Ontario Trustee failed to follow the three prerequistes in Wall v Shaw but more important, he disregarded the terms of the Will by failing to confer with Doris each time he took interim compensation. He also breached the terms of the Will by registering the mortgage and incurring debts without conferring with Doris. Therefore in this respect he also committed a breach of trust (paras 92-93).
3.3 Inaccurate Capital Gains Information
In the court’s opinion, the Ontario Trustee was entitled to rely on what he believed was sound advice by Wolfgang’s accountant and indeed he was required to do so before conferring with Doris. Since experienced lawyers for both parties initially failed to make further inquiries about capital gains liabilities, it was unreasonable the Ontario Trustee to have done so.
3.4 Courts of Justice Act, Section 100, and Equitable Relief
Section 100 of the Courts of Justice Act[6] empowers a court to order that an interest in real or personal property vest in any person. The vesting power is rooted in equity[7] and therefore the party who seeks a vesting order must come to court with clean hands. The Ontario Trustee did not do so. While he was given discretion to sell the farmlands even if the beneficiaries opposed the sale, he could only exercise this discretion if he first conferred with Doris, which he failed to do. That failure was ‘unreasonable, inexcusable, and fatal to his claim for equitable relief’. Consequently, the Ontario Trustee was not entitled to the vesting order he sought (paras 109-111).
4. Conclusion
Accordingly, his Honour dismissed the Ontario Trustee’s application. He also granted Doris’ counter application in part by refusing to approve the APS, and, on consent, removing the Ontario Trustee and appointing a replacement.
His Honour did not provide authority for exercising the power to remove the Ontario Trustee and appointing a replacement. In fact, there are two sources for this authority. The first is s 5 of the Trustee Act.[8] It empowers the court make an order to appoint a new trustee either in substitution for or in addition to any existing trustees. Thus, under this power the court cannot simply remove a trustee but must appoint a substitute. The other source of authority to remove a trustee is the court’s inherent jurisdiction and under that jurisdiction it is not required to appoint a substitute. Nonetheless, a court will not simply leave the trust without a trustee but will always appoint a substitute in that case.[9]
In Letterstedt v Broers,[10] a case that has been consistently followed in Canada, the Privy Council held that the test for removing a trustee is whether it is necessary for the welfare of the beneficiaries. A breach of trust certainly falls in that category, unless it is a mere technical breach of trust that was done for the best interests of the beneficiaries.[11] In any event, the breach of trust in this case was sufficiently serious to merit removal. Perhaps the disharmony and conflict between the Ontario Trustee and the beneficiaries might have served as an additional ground.
—
[1] 2022 ONSC 4117.
[2] 2019 ONCA 929 (reconstituted as a panel of the Divisional Court when hearing the appeal), paras 43-44.
[3] Perhaps this usage derives from the term ‘pre-planning’ which is a favourite of the funeral industry. It is also a non sequitur. The prefix pre- means ‘before’. So what the term is really saying that you are planning your funeral before you are actually planning it!
[4] This Act was promulgated by the Uniform Law Conference of Canada in 2012. It can be found online at http://www.ulcc.ca/images/stories/2012_pdfs_eng/2012ulcc0028.pdf. The term “interim compensation” is not actually used in s. 65 but is used in the section’s heading. For a discussion of the Act, see Albert H. Oosterhoff, ‘Trust Law Reform: The Uniform Trustee Act’ (2014), 34 E.T.P.J. 329. The two statutes that have enacted the Uniform Act, have also adopted the term ‘interim compensation’. See Trustees Act, SNB 2015, c 21, s 64; Trustee Act, SA 2022, c T-8.1, s 70.
[5] In fact, the Ontario Law Reform Commission recommended that trustees be allowed to take interim compensation almost 40 years ago. See Report on the Law of Trusts (Toronto: Ministry of the Attorney General, 1984), pp. 255-61.
[6] RSO 1990, c C.43.
[7] Third Eye Capital Corporation v Resources Dianor Inc/Dianor Resources Inc, 2019 ONCA 508, para 34.
[8] RSO 1990, c T.23.
[9] NorthWest Value Partners Inc v Bell (2010), 56 ETR 3d 1 (Ont CA).
[10] (1884), LR 9 App Cas 371 (PC).
[11] See Waters’ Law of Trusts in Canada, 5th ed by Donovan WM Waters, Mark R Gillen, and Lionel D Smith (Toronto: Thomson Reuters, 2021), p 950.
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