The cost to a trustee of an innocent breach of fiduciary duty

A decision of the Ontario Superior Court (‘OSC’) has considered what remedy might be appropriate where a trustee has made significant breaches of trust through an innocent lack of understanding. The trust beneficiaries had suffered no loss as a result of the breaches, other than the cost of having documents prepared for the Court to examine what had become of the trust funds. Whilst the decision would not be binding on Cayman Islands Courts it would be persuasive argument.

What was the nature of the trust?
The trustee (‘Trustee’) was a successful businessman who had moved to Canada from Europe. Early in his career he had established a trust to benefit his family. He created successful companies which he sold for Can$31m, what seemed to him and his wife at the time as unimagined wealth. On the sale of his first company he retained CAn$8m and the trust received Can$21m of the proceeds of the sale based on its shareholding in the company he had just sold.

How did the Trustee behave?
The Trustee saw the trust money as his own, and that it was all one pot of money which came from the sale of his company. The beneficiaries acknowledged the Trustee did not really understand that he was not a beneficiary of the trust and could not benefit himself from the trust.

Then what happened?
After the sale of the first company, the family’s way of spending money changed dramatically. They bought a luxury home in an exclusive area, a multi-million-dollar holiday home, boats and cars and the children were sent to exclusive private schools. The Trustee semi-retired but then set up another company which was also extremely successful. Along came a corporate jet, luxury vehicles and racing cars, which the Trustee drove in races under the company banner. His business acumen led to his also becoming a public speaker, author and television personality.

Who asked about the trust monies?
On the break- up of his marriage, the Trustee’s wife asked for an account of where the trust monies had been spent. The Trustee had no records so he employed an expert in forensics and accounting to do the job of reconstructing what had been spent.

What did the expert find?
He found there was a lot of work to do. Working 50-60% of his time on the task, the expert (plus two full-time staff and a co-op student working under the expert’s supervision) took three months to undertake the initial tracing of the trust funds. They reviewed ten years’ worth of bank statements for eleven bank accounts or investment accounts. The expert also needed to review 3,700 transactions in the shareholder account for the Trustee’s second company.

Had the Trustee done something wrong?
The OSC found that there was no question the Trustee had breached his fiduciary duties in comingling trust funds with both his own funds and those of the second successful company which he founded.
What is the Canadian courts approach to appropriate remedy?

Under Canadian law the court must consider a trustee’s breach in light of all the circumstances, such as whether it was a technical breach or a minor error of judgment. Another factor it considers is whether the trustee was paid and/or a professional. The burden falls to the trustee at fault to show he or she acted honestly, reasonably and ought fairly to be excused.

How did that work in this case?
In this case the Trustee’s breaches of fiduciary duty were more than technical and the OSC found it hard to quantify his errors in judgment as minor. It considered he had taken a cavalier attitude to the assets of the trust and had had no idea what his obligations were as a trustee. He did not conduct himself appropriately, keep proper records nor have the trust’s accounts routinely checked. On the other hand he was not a professional trustee and did not receive payment for his role. The OSC found that the breach was innocent and the only loss to the trust and the beneficiaries was the cost of the exercise of creating and reviewing the trust’s accounts.

What were the consequences and what was the remedy?
The OSC found that had the Trustee acted appropriately there would have been no need for an application to the court to consider the breaches of trust nor for the cost of reviewing the trust’s accounts. The OSC considered that the remedy was to order that the Trustee personally bear all the trust and beneficiaries’ costs of the application and the review of the accounts.