The recent decision of the Ontario Court of Appeal in Penman v. Penman (119 O.R. (3d) 128) serves as a good reminder to trustees of their duties and responsibilities when acting as trustee and the consequences of failing to act accordingly. In particular, it is an example of how the personal liability of a trustee is real and demonstrates the consequences to an individual of not taking an active role when acting as trustee of a trust.
Although the Penman decision was not decided in the charitable context, it is nonetheless applicable to trustees of a charitable trust, be it a charitable remainder trust or a charity established by trust indenture.
The appellant in the Penman decision appealed from a ruling of the Superior Court of Justice that she was jointly and severally liable, together with two other trustees, for the sum of $453,048 plus interest. This amount represented the value of funds wrongfully removed from a trust created by her late brother and her sister-in-law for the benefit of their grandchildren.
The Ontario Court of Appeal dismissed the appeal and upheld the decision of the Superior Court of Justice.
This case concerned an improper investment of trust funds. The court found that the appellant had signed a resolution authorizing her co-trustee to invest trust funds in the exercise of his unfettered discretion. After doing so, the court found that the appellant had failed to make any inquiries regarding the investment of the trust funds or her co-trustees’ dealings with the funds.
The court rejected the appellant’s argument that she was misled by her co-trustees regarding the use and investment of the trust funds. Pursuant to section 27 of the Trustee Act, when investing trust property, a trustee must exercise the care, skill, diligence, and judgment that a prudent investor would exercise in making investments. The court found that the appellant did not act reasonably in relation to her duties as co-trustee and did not comport herself in accordance with section 27. In fact, the court went so far as to say that she had abdicated her duties entirely by improperly delegating all of her powers, duties and authority to her co-trustees. The court also found that the appellant’s conduct amounted to wilful neglect and default because she had placed trust funds in the hands of another and allowed it to remain there for years without any inquiry or any assurance that the trust was being properly administered. By her own admission, the appellant barely read anything to do with the proposed investment and simply signed whatever was placed in front of her. She made no inquiries to understand all of the details of the investment and she signed a resolution allowing her co-trustee to do whatever he wished with the trust funds without the necessity of having to consult with her further or obtain her authorization.
The appellant sought to be absolved from liability on two grounds. First, the trust contained an “exculpatory clause”, which stated that the trustees were not responsible for the acts of default of each other or for any error in judgment or for any act of omission or commission not amounting to actual fraud. The court held that this clause will not protect a trustee where it is found that the trustee improperly delegated his or her power or discretion. This type of exculpatory clause is found in many trusts and trustees should not assume that it will protect them from all liability with respect to the trust and its beneficiaries.
The appellant also tried to rely on section 35 of the Trustee Act, which excuses trustees from liability for breaches of trust and failure to seek direction of the court where it is found that they acted honestly and reasonably. However, the court found that this section does not apply in the context of investment of trust property.
In the end the appellant was found to be jointly and severally liable. In other words, even though she was one of three trustees, she was nonetheless liable for the entire loss to the trust. While it would be open to her to sue her co-trustees for indemnification, this was likely cold comfort to her in the face of this decision. This case serves as an important reminder to trustees. A trustee is a fiduciary. He or she owes a duty to the beneficiaries of the trust. At the very least this means that a trustee must be engaged in all matters concerning the trust and take part in decisions concerning trust property. The investment of trust property should not be taken lightly. Where a trustee does not wish to be actively involved in the management of a trust, he or she should resign. Where a trustee does no more than assume a passive role as trustee, he or she unnecessarily exposes himself or herself to personal liability – i.e. his or her personal assets are available to satisfy a judgment such as the one rendered in this case. Trustees who do not have the time or inclination to take an active role should think twice before accepting an appointment as trustee.