The decision of Frye vs. Frye - Episode #145
Listen to The decision of Frye vs. Frye
This week on Hull on Estates Ian Hull and Suzana Popovic-Montag look at the decision of Frye vs. Frye, a case that was released in September 2008. It is an important case from a litigation standpoint as well as a state planning standpoint. Their discussion deals with the analysis of what will happen to the family business.
Feel free to send us an email at hull.lawyers@gmail.com or leave us a comment on the Hull on Estates blog.
The decision of Frye vs. Frye - Episode #145
Posted on January 13th, 2009 by Hull & Hull LLP
Suzana Popovic-Montag: Hi and welcome to Hull on Estates. You’re listening to episode 145 of our podcast on Tuesday, January 13, 2009.
Welcome to Hull on Estates, a series of podcasts for the Canadian legal community dealing with issues and insights surrounding estate planning in Canada. Hosted by the lawyers of Hull & Hull, the podcast will touch on some key considerations when planning estates and wills. Now, here are today’s hosts.
Ian Hull: Hi Suzana.
Suzana Popovic-Montag: Hi there Ian, how are you today?
Ian Hull: I’m great. This is Ian Hull and Suzana Popovic-Montag. And we’re doing Hull on Estates this week in a chilly, Toronto wintery weather but we thought we would look back to warmer days of April 2008. We’re going to talk about a case that was finally released in September 2008. But first, please feel free to give us any feedback at hull.lawyers@gmail.com.
Suzana Popovic-Montag: Or you can feel free to visit our blog at estatelaw.hullandhull.com.
Ian Hull: Okay, so we’re going to talk about the decision of Frye vs. Frye, spelled F-R-Y-E. And it’s the Frye estate that came under the gun of litigation. The decision was released by Ontario Court of Appeal at 42 ETR (3d) 190, which is an important case for us, both from a litigation standpoint and from an estate planning standpoint. And really, if you wanted to summarize the issue that was dealt with in this case, it was an analysis of what will happen to the family business. And when we say that, we say that because carefully organized estate plans, both before death and after, typically will have shareholder’s agreements and agreements amongst the family as to how the transition and succession of the family business will proceed. This family did a great job of that but unfortunately for a bunch of reasons, still ended up in litigation.
The background on this is that there were 5 children of hopefully, because it went to the Court of Appeal, a very wealthy man who had died, the deceased died in 1991. But he had 5 children. One of his children, Cam, died after the deceased had passed away and in his Will, Cam gave the shares of the family company to his sister. So if we sit back and we sort of look at this case at 30,000 feet, we’ve got a dad who creates a fairly substantial holding company. Before his death essentially, and we’ll get into some of the details of the case but in general terms, the Will…his estate plan before death and then on his death, essentially divides this large asset equally amongst the 5 children. The issue is there is that it vests in all of the remaining 5 children who are all alive at the time. Then we have Cam who passes away and there is a fight as to where Cam’s shares could go because Cam put in his Will he’d like his sister to have his shares. One of his brothers didn’t like that, didn’t want Cam’s shares to go to his sister and wanted what was essentially a formal mechanism established by a series of steps which started with letters patent through to two sets of shareholder’s agreements, that restricted transfers of shares.
So the Court of Appeal said alright, the big debate here is this: can you contractually be bound to deal with the shares, or do we want to keep the balance for policy reasons, we want to allow people to do what they want with their assets on their death? So that was the struggle. You know, whether or not this family owned shares could be dealt with without intervening contractual limitations.
Suzana Popovic-Montag: And I think, Ian, the case is particularly noteworthy because at first instance, the judge said that in fact, the bequest of those shares was null and void. And the reason for that is because, said the judge, the actual parties were bound by this contractual arrangement whereby they had agreed during their lifetime that they would not transfer the shares without the consent of, you know, the majority of the shareholders. And the Court of Appeal went out of its way to overturn that decision and I think did so in a very well reasoned manner.
Ian Hull: And really what, again, we don’t…the case isn’t long and its easy to read but the facts are kind of interesting because the children in this case did what…and the father…did really what would amount to almost everything they could do to organize the orderly succession of the shares during the lifetime of the father, and then after death. And what they did was, they first of all…and its interesting because this is what we would typically see in estate plan…the father, before death, had made it clear that he wanted his estate to be divided equally. He became incapable. The children then got together and quite properly organized themselves and created a unanimous shareholder’s agreement that essentially mirrored what the father had created in 1968 and that was that there were some restrictions on the transfer of shares. He didn’t want the shares to be just transferred out to different third parties willy-nilly. So the children sort of, when he became incapable before he passed away, did the right thing it seems. They got organized and said well let’s just sort of update this. We’re updating his Will in a sense. It’s 1968 that he said it, it was a bit vague, the language then didn’t make it entirely clear, so they got it professionally updated. That shareholder’s agreement and the provisions of which are reasonably clear. Then on the passing of their dad in 1991, they are faced with what is, they understand, a vested and indefeasibly vested asset in their hands. So the children carry on their merry way to preserve the company.
And the interesting thing in the shareholder’s agreement, the unanimous shareholder’s agreement that they entered into just before their father’s death, the language in it, one of the things they actually included in it was what I would call sort of general ‘feel good’ language. And one of the provisions in the shareholder’s agreement said that the fixed purpose and intent was to preserve the Frye Group as a family business for all of his children to share equally. So I just thought that was interesting to see because we talk about all of the substantive issues. Well, there’s an emotional language issue that they threw into it. So I was really impressed by the efforts that the family undertook to sort of control the ownership interest. But then when it passes to Cam, and then Cam passes it to his sister, I think…and I don’t know but I think…the Court of Appeal must have struggled because they obviously held that notwithstanding the contractual provisions, the Will prevails. But I think, in large part, the Court of Appeal probably had to look at those contractual provisions and say, where does it say that a son and daughter can’t transfer amongst themselves? And what father wouldn’t want the daughter, if one of the sons died, to receive the shares, because you are essentially keeping it in the family that way? And I just struggle, and you know when you read these cases you don’t really know what the Court’s heard or seen or thought about. But I also think it was the sensible decision on the very practical level that the provisions of the shareholder’s agreement or the letters patent didn’t seem to speak to a prohibition of transferring shares amongst the family members. And that’s what the Court of Appeal ultimately held. And it makes good sense as well. And so while the Court of Appeal bent over backwards to preserve the provisions of the Will, it did so probably for the right reason on the face of it.
So as I sit back and I analyze these cases, I think the other point that was interesting is around paragraph 20 and 21 of the decision, the Court of Appeal quite professionally and decently notes that at the first instance a fairly significant provision of the Business Corporations Act was not brought to the attention of the trial judge. And I think that’s worth some comment.
Suzana Popovic-Montag: And that Section, Ian, is Section 67(2) of the Business Corporations Act which Section actually provides that a corporation is to treat an executor or an estate trustee of the estate of a deceased shareholder as the registered security holder who is then entitled to exercise all the rights of that security holder that the person represents. In other words, that the estate trustees of Cam’s estate were therefore, by virtue of this provision, to become the registered holders of these shares.
Ian Hull: And I think that’s important. I mean, I do think in some ways that the Court of Appeal kind of overreacted to that by saying oh, it wasn’t said at the trial level, in some respects, because its almost trite law that the interests of Cam’s ownership interests anyway, Cam’s shares, both beneficially and legally, transferred to Cam on the death of his father. But I think what the Court of Appeal needed to do and this is another interesting way you watch this analysis, what they do is that they needed to find good, substantive authority for the vesting comment. So they clearly, they wanted to emphasize that its vested both in legal and beneficially at the time of death of the father and they, of course, cite one of the leading, if not the leading, Professor Oosterhof’s book, which talks about the right of vesting that essentially occurs on death.
So in coming to its conclusion, its supported obviously by good law but again, if you sit back and look at this, you can see where the Court is going to bend over backwards to encourage the provisions of a Will to prevail if it makes sense and if the parties haven’t contemplated the alternative. And in this case, they simply didn’t appear to contemplate that passing shares between siblings was improper. We only have the reasons, we don’t have all of the shareholder’s agreements and so forth but it probably would have been brought to the Court’s attention if there was some prohibition in that regard. So the Court of Appeal sat back and said, here’s a family-run business, well organized before death, well organized after death. The family is co-operating, they’re trying to hold together as a family business. They weren’t going to step in, it appears to us anyway, and upset the applecart when what really was happening here was preserving the family business because the shares were going to another family member.
Suzana Popovic-Montag: Well, Ian, I think that that’s one great illustration of the Court’s attempt to really uphold the testamentary intention in a very creative fashion and I want to thank you for joining me today on Hull on Estates. Just a quick reminder to our listeners to feel free to provide us with any feedback they might have at hull.lawyers@gmail.com.
Ian Hull: And please come see our blog at estatelaw.hullandhull.com.
Suzana Popovic-Montag: Thanks very much, Ian.
Ian Hull: Thanks Suzana.
This has been Hull on Estates with the lawyers of Hull & Hull. The podcast you have been listening to has been provided as an information service. It is a summary of current legal issues in estates and estate planning. It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.
To listen to other podcasts, or to leave a question or comment, please visit our website at www.hullandhull.com.
Our theme music is Upper Structure by DJ AKid and is courtesy of the Podsafe Music Network.
