Sep 26, 2014

Trusts; Conflict of Interest; Prudent investor standard

Miles v. Vince, 2014 BCCA 289 (CanLII)

Trustees have obligations of prudence to protect not just the corpus of the trust, but also the interest of the beneficiaries from the ongoing operation of the plan

BACKGROUND: The Appellant, Cynthia Miles, and her children are the beneficiaries of a trust settled by her deceased husband with insurance proceeds on his life. The Respondent, Marilynne Vince, was the sister of the deceased and the trustee of both this "Insurance Trust" and a trust the settlor had established for his children with properties he intended to develop into a multi-use development including social housing. The court referred to this trust as the “Family Trust”. Both trusts are discretionary trusts, and grant broad powers to the trustee to invest the property and make distributions of income and capital to the beneficiaries. The Appellant and the children are entitled to receive income and encroachments of capital from the Insurance Trust at the trustee's discretion. The Respondent took the position that the deceased had told her his vision was to develop the properties that were the subjects of the Family Trust, so she took steps to determine the most effective way to maximize the highest and best use of the properties. In her capacity as trustee, the Respondent loaned the assets of the Insurance Trust to the Family Trust to be used for the purposes of the development of the properties, secured in part by a second mortgage on the properties. The loan was subject to a priority agreement which restricted enforcement of the second mortgage and gave an option to purchase the secured properties to BC Housing, which would require the Insurance Trust to discharge the mortgage for no payment or consideration. The Family Trust loaned the entirety of the amount of the loan to the William Vince Non-Profit Housing Society. The loan agreement was amended several times, increasing the principal amount of the loan. No principal or interest was paid on the loan from the time it was made in December 2009, and no demand for payment was made, although the loan became due and payable December 31, 2012. The Appellant applied for an order removing and replacing the Respondent as trustee of the Insurance Trust. She claimed the Respondent breached her duties as trustee to prudently invest the trust assets and was in a conflict of interest as trustee of both trusts. The Respondent took the position that she was following the deceased's intentions. The chambers judge noted the highly discretionary nature of the Insurance Trust and concluded that investing in social housing was not inconsistent with the settlor's intentions as set out in the trust instrument. The Appellant argued that the priority agreement made the second mortgage security on the loan useless, and amounted to an imprudent investment. The chambers judge found this highly speculative and unlikely to come to pass. He also concluded that the loan was not in default.

APPELLATE DECISION: The appeal was allowed. The Appellant argued that the chambers judge misapprehended the evidence when he found the loan was not in default, and that this mistake led him to conclude the loan was a prudent investment. She also claimed the Respondent failed to consider the best interests of the beneficiaries of the Insurance Trust. The Respondent took the position that she was acting prudently and in accordance with the settlor's intentions. She also denied being in a conflict of interest or being other than even-handed among the beneficiaries of the two trusts. Her goal was to benefit the capital beneficiaries of both trusts (the children) by maximizing the capital growth of the trust assets. The Court of Appeal considered the prudent investor standard, and referred to the Court's earlier decision in Froese v. Montreal Trust Co. of Canada. In Froese, the Court applied the Supreme Court of Canada's decision in Fales v. Canada Permanent Trust Co., which stated that "however wide the discretionary powers contained in the will, a trustee's primary duty is preservation of the trust assets". The majority in Froese stated that "true trustees have obligations of prudence to protect not just the corpus of the trust, but also the interest of the beneficiaries from the ongoing operation of the plan." The Court in this case cited Waters on Trusts for the principle that diversification is implicit in the prudent investor standard, based on modern portfolio theory. The Court found that the Respondent did not meet her statutory obligations to act as a prudent investor with respect to the assets of the Insurance Trust. She was required to consider the interests of all of the beneficiaries, including the Appellant's interest. In the Court's view, the chambers judge erred by conflating the settlor's intention with respect to the Family Trust with that of the Insurance Trust. The loan was clearly in default, and the priority agreement made it so that if BC Housing exercised its option to purchase, the loan would have no value. The Respondent also breached her duty of impartiality between the capital and income beneficiaries of the Insurance Trust. The Court removed the Respondent as trustee and replaced her with another trustee.