Civil procedure — Estoppel — Estoppel by record (res judicata) — Res judicata as a bar to subsequent proceedings — Application by Kuzel for discharge as administrator of estate allowed in part — No final determination about whether potential future claims against Kuzel were res judicata could be made until such claims were brought.

Wills, estates and trusts law — Executors and administrators — Actions against — Application by Kuzel for discharge as administrator of estate allowed in part — Discharge from role as administrator did not confer immunity to Kuzel for actions brought against him in the future relating to administration of estate — Future claims against Kuzel could be res judicata if they alleged same breaches as were adjudicated during Kuzel's application for compensation.

Application by Kuzel for discharge as administrator of estate — Svoboda alleged that Kuzel breached his fiduciary duty toward estate — Kuzel applied for compensation as administrator — His application was allowed in part and deductions were made from his compensation for benefits he received from estate — Kuzel claimed that discharge as administrator acted as immunity from future prosecution relating to administration of estate — Kuzel argued that deductions made from compensation rendered any future actions for breach of trust res judicata — HELD: Application allowed in part — Kuzel was discharged as administrator — Discharge did not confer immunity to Kuzel for actions brought against him in the future relating to administration of estate — No final determination about whether potential future claims against Kuzel were res judicata could be made until such claims were brought — Future claims could be res judicata if they alleged same breaches as were adjudicated during Kuzel's application for compensation.

Statutes, Regulations and Rules Cited:

Trustee Act, R.S.A. 2000, c. T-8, s. 1, s. 14(2), s. 14(2)(b) (i), s. 41, s. 46

Counsel:

Wanda M. Fawcett
Bishop & McKenzie LLP
       for the Applicant

Helen R. Ward
Duncan & Craig LLP
       for the Respondent

       ROSS J.:—

Introduction

¶ 1      In this application Paul Kuzel, the former administrator of the estate of Frantisek Cikanek, seeks to be discharged as administrator. He further seeks an express acknowledgment that he is not only discharged from his duties, but that he has fully accounted to the estate and is released from any further claims by the estate. The current administrator of the estate, Petr Svoboda, takes the position that any discharge of Mr. Kuzel should be without prejudice to the estate's right to seek damages from Mr. Kuzel for breach of fiduciary duty.

Background

¶ 2      This is the final application in a series of related applications dealing with Mr. Kuzel's removal and replacement as administrator of the Cikanek estate. On October 15, 2004, Mr. Kuzel was removed as administrator by an order granted by myself on application of Mrs. Cikanek. That order provided that "no findings were made with respect to the allegations made by the beneficiary against Mr. Kuzel, and that the direction for his removal was due to the breakdown in the relationship between the administrator and the beneficiary." Mrs. Cikanek sought other relief, as did Mr. Kuzel by cross-application, however those motions were was adjourned to be dealt with at a later date.

¶ 3      On November 30, 2004, I granted a further order respecting legal representation of the estate and delivery of accounting records. That order adjourned "the balance of the application by Paul Kuzel, including Mr. Kuzel's request for administrator's compensation and management fees, legal costs, and a full discharge" to a separate hearing before me.

¶ 4      The compensation application was heard on February 10, 2006 and on February 22, 2006, I delivered oral reasons for decision. In those reasons I considered Mr. Kuzel's claim for compensation in the amount of $61,400.00 and Mr. Svoboda's position on behalf of the estate that Mr. Kuzel was not entitled to compensation because he breached his fiduciary duty to the estate. I concluded, based on the evidence contained in affidavits as well as cross-examinations on some of the affidavits, that Mr. Kuzel worked many hours for the estate, in the main honestly, and provided value to the estate. Instances in which he received improper benefits could be remedied by deductions from the claim for compensation. As to instances of conflict of interest, the evidence did not reveal any resulting loss to the estate or gain to Mr. Kuzel.

¶ 5      I assessed Mr. Kuzel's entitlement to compensation, based on the nature of work done and the hours involved, at $46,000.00. From this amount deductions were made for prepaid compensation, and to account for personal benefits received by Mr. Kuzel from the estate. This reduced the amount payable for compensation to $19,600.00. Costs were also dealt with. I held that Mr. Kuzel was entitled to taxable costs on column 1 payable out of the estate.

¶ 6      At the conclusion of the proceedings on February 22, 2006, counsel for Mr. Kuzel sought his full discharge as trustee, taking the position that a discharge would release him from any further claims pertaining to his administration of the estate. Counsel for Mr. Svoboda took the position that the estate should still have the opportunity to pursue Mr. Kuzel for damages for breach of fiduciary duty, and that it should be made clear that any discharge would not preclude this. That issue was adjourned for further argument.

¶ 7      The application relating to the discharge of Mr. Kuzel, and the implications of a discharge in terms of a possible future action by the estate against Mr. Kuzel was argued on September 25, 2006.

Issues

¶ 8      The following issues were raised in argument:

Law and Analysis

¶ 9      Before dealing with these issues, it is helpful to reflect on Mr. Kuzel's status, and on the authority for the Orders that first appointed him as Administrator of the Estate, and subsequently removed him from that role. Mr. Kuzel was not initially Administrator of the Estate. Frantisek Cikanek died on July 28, 2000. By his will dated May 15, 1987, he appointed James Scott, Barrister & Solicitor, as the executor and trustee of his estate and gifted all of the estate to his wife, Milada Cikanek. The will was probated September 26, 2000 by James Scott, and Mr. Scott was appointed as the executor and trustee. He was later removed by Consent Order on March 20, 2001. Mrs. Cikanek attested that she applied to have Mr. Scott removed as executor because she was concerned about the legal fees he was charging. However, Mr. Scott renounced his position, which led to the Consent Order appointing Mr. Kuzel as Administrator of the Estate in place of Mr. Scott.

¶ 10      Although this was not referred to in the Consent Order, Mr. Kuzel's appointment appears to have been pursuant to s. 14(2) of the Trustee Act, R.S.A. 2000 c. T-8:

¶ 11      By renouncing his position, Mr. Scott expressed a desire to be discharged prior to completing his duties as executor, the exact situation envisioned by s. 14(2). Mr. Kuzel's appointment by the Consent Order then fits within s. 14(2)(b)(i), characterizing him as a replacement administrator ("trustee" includes an administrator of an estate: Trustee Act, s. 1).

¶ 12      On the other hand, the application resulting in the Order of October 15, 2004 removing Mr. Kuzel as administrator and appointing Mr. Svboda, would appear to have called on the Court's authority to appoint a judicial trustee under s. 46 of the Trustee Act:

¶ 13      I turn now to the issues raised in argument.

       Administrator Liability

¶ 14      Mr. Kuzel seeks to be discharged from his position as administrator, and takes the position that a discharge excuses an administrator from any further liability stemming from estate-related activities. Section 46 of the Trustee Act, under which Mr. Kuzel was replaced as administrator, does not specifically contemplate discharge of the replaced trustee. However, as Mr. Kuzel now desires to be discharged from his duties as trustee, his current application invokes the Court's powers under s. 14(2), which provides that the Court "after the passing of the accounts, may make an order discharging the applicant."

¶ 15      The reference in s. 14(2) to the passing of accounts introduces another issue. Mr. Kuzel began this series of applications as a respondent to an application to remove and replace him, and as an applicant seeking advice and direction from the Court. In the October 15, 2004 Order, he was removed and replaced by Mr. Svoboda. In the November 30, 2004 Order, accounting records pertaining to the estate were turned over to Mr. Svoboda. The "balance of the application by Paul Kuzel, including Mr. Kuzel's request for administrator's compensation and management fees, legal costs, and a full discharge" were adjourned. In the proceedings to date, Mr. Kuzel has not sought nor been granted a formal passing of accounts.

¶ 16      Written submissions made on behalf of Mr. Svoboda at the compensation application did seek an order for an accounting, however, as I noted when giving my decision on that application, that remedy was not pursued during oral argument:

¶ 17      Although this point was not argued, for the purposes of this application, I will assume that I have the authority to discharge Mr. Kuzel as administrator of the estate, even though there has been no formal passing of his accounts.

¶ 18      This brings me to the first issue raised in argument, namely the effect a discharge would have on Mr. Kuzel's future liability for his actions relating to the estate. Although my review of the law suggests that there is no distinct definition given to the term "discharge" as it applies to the context of estate administration, I conclude that the effect of a discharge is to absolve the trustee from any remaining fiduciary duties owed to the estate and its beneficiaries. I can find no basis for the argument that a discharge provides a trustee with wide-sweeping immunity from future litigation.

¶ 19      Trustees have several methods of shielding themselves from claims that they mismanaged an estate. There are several well-established defences available to trustees facing breach of trust allegations, such as: (i) exculpatory clauses; (ii) concurrence by the beneficiary; (iii) expiry of limitation periods; and (iv) statutory excuse: Waters, et al, Waters' Law of Trusts in Canada, 3rd ed., (Toronto: Thomson Carswell, 2004) at p. 1236.

¶ 20      It is the last of these defences that is most frequently employed. According to Professor Waters:

¶ 21      The statutory power to excuse a trustee from liability for breach of trust arises from s. 41 of the Trustee Act. That section reads as follows:

¶ 22      Section 41 was raised by counsel for Mr. Kuzel in the application relating to his compensation. I held, however, that s. 41 was inapplicable in that application:

¶ 23      Therefore I did not at that time make any ruling excusing Mr. Kuzel from personal liability under s. 41. On the other hand, I did rule that Mr. Kuzel had satisfied his personal liability for losses to the estate as established in the evidence before me.

¶ 24      I have not been directed to, nor have I located, any statutory or case-based authority for the claim that a discharge automatically entitles a trustee to immunity from future estate-related litigation. To the contrary, the law respecting defences to trustee liability suggest that a trustee must wait until a breach of trust claim is brought and then must rely on one of the available defences to protect themselves from liability. This, in my view, is consistent with the language of s. 41 which indicates that it applies "in any proceeding affecting trustees or trust property" where it appears to the court that a trustee "is or might be personally liable for any breach ... then the court may relieve the trustee either wholly or partly from personal liability for the breach of trust."

¶ 25      Counsel for Mr. Kuzel contends that the issue of trustee immunity is not usually contested and a clause to that effect is often contained in the form of order accompanying a consent discharge for application. Counsel for Mr. Svoboda argues, and I agree, that if such clauses are indeed included as a matter of common practice, this indicates only that parties frequently agree on this point. When there are allegations of wrong-doing on the part of the trustee, the parties are not likely to agree to the inclusion of such a clause, as is exemplified in this case.

¶ 26      The notion of exempting a trustee from future liability by granting them a discharge conflicts with the general theme overarching the law relating to trustee liability. The law seeks to protect beneficiaries and the incapacitated by providing remedies against trustees who abuse their position. By providing a discharged trustee with immunity against future claims for breach of trust, the Court would in effect be rewarding a successfully dishonest trustee. If an administrator applied for and received a discharge before their wrongdoing was discovered, the beneficiary would be helpless to pursue a remedy. The better the trustee was at disguising their abuse, the more likely they would be to escape liability.

¶ 27      Furthermore, the idea that a discharge grants a trustee immunity from litigation runs afoul of the beneficiary's proprietary right to the trust property. According to Professor Oosterhoff:

¶ 28      Allowing a discharge to create blanket immunity from estate-related litigation would sever the beneficiary's proprietary right to the trust property and make it impossible for them to seek an appropriate remedy against a trustee who has engaged in maladministration of an estate.

¶ 29      There is also some case law suggesting that discharged trustees can be sued for breach of trust. For example, in Lacombe (Re), [1996] A.J. No. 893 a trustee who had been removed from his position by court order conceded that he had engaged in breach of trust. Rather than challenging the beneficiary's right to seek remedy against him by virtue of the discharge, he challenged the Surrogate Court's jurisdiction to award damages for breach of trust. Wilson J. agreed, deciding [at para. 25] that if the beneficiary was entitled to damages, she would have to pursue her remedy before the Court of Queen's bench.

¶ 30      Even if a discharge does not automatically release a trustee from personal liability in any future litigation arising out of the trustee's administration of the estate, it is possible that the Court has inherent jurisdiction to make an express order to this effect. However, I have not been directed to nor have I located any authority supporting this form of inherent jurisdiction. According to Professor Waters, in the context of estate administration, the inherent jurisdiction of the courts:

¶ 31      Waters' description of inherent jurisdiction in this context does not appear broad enough to encompass orders granting trustees blanket immunity from litigation. Nor does such an exercise of jurisdiction seem necessary. The established defences adequately protect trustees who ought to be saved from liability if and when an action is brought against them.

¶ 32      I do not believe that the Court possesses the power to preemptively excuse the administrator from future causes of action via a discharge. I can find no statutory authority or case precedent in support of this contention. Even if the Court's inherent jurisdiction does extend to permit such an order, I would decline to exercise that jurisdiction.

       Res Judicata

¶ 33      The second issue is whether my ruling regarding Mr. Kuzel's entitlement to compensation bars future claims against Mr. Kuzel for breach of trust. There is case law which suggests that when allegations of breach of trust arise and are dealt with at a hearing to pass the accounts of an administrator, the same issues cannot be subsequently raised in a separate action. The Courts in Alberta have ruled that in these circumstances, the subsequent statement of claim ought to be struck as it is tantamount to a collateral attack on the ruling of the judge who heard the application to pass accounts. Although the application before me was related to compensation, rather than a passing of accounts, it seems to me that the same principle would apply. However, no final determination on this point can be made in this application. The question of whether claims are res judicata depends on the particular claims brought in a subsequent action and their relationship to claims adjudicated in the earlier application, and so can only be determined when the subsequent action is brought.

¶ 34      In Holmes v. National Trust Company, [2002] A.J. No. 1347, the defendant National Trust sought to strike out the plaintiff's statement of claim, basing its application in part on the doctrine of res judicata. National Trust had a two-fold relationship with the plaintiff, as trustee for his parents' estate of which he was beneficiary, and as his agent pursuant to an investment agency agreement. The plaintiff's allegations in the Statement of Claim concerned both relationships. National Trust argued that the validity of its handling of the estate had already been dealt with during a previous application to pass its accounts. That application resulted in an order passing the National Trust's accounts, and directing that its quantum of fees be determined by resort to arbitration.

¶ 35      Kenny J. determined that the estate issues ought to be dealt with by the Surrogate Court, and therefore did not make a definitive ruling on the res judicata issue. However, she did make the following observations [at para. 24] regarding application of the doctrine:

¶ 36      On appeal, the Court of Appeal did not comment on Kenny J.'s opinion regarding the res judicata issue: see Holmes v. National Trust Co., [2003] A.J. No. 1665. The appeal was allowed in part, the Court ordering that the whole of the plaintiff's claim should be dealt with by the Court of Queen's Bench. In a subsequent application in this Court, Nation, J. considered whether the estate claims should be struck as res judicata reaching the same conclusion as Kenny J. In her decision in Holmes v. National Trust Co., [2004] A.J. No. 1515, Nation J. ruled [at paras. 9-10]:

¶ 37      The plaintiff's claims arising from administration of the agency agreement were permitted to proceed, subject to the provision of particulars.

¶ 38      The plaintiff once again appealed the striking out of a portion of his claim. The Court of Appeal did not interfere with Nation J.'s ruling: see Holmes v. National Trust Co. [2006] A.J. No. 159. However, Martin J.A. ruled that:

¶ 39      The result appears to be that specific rulings on allegations of breach of trust made during an application to pass accounts will bar subsequent actions based on the same allegations. However, if the facts underlying the breach of trust allegations form part of the facts supporting a separate cause of action, that action may not be considered res judicata.

¶ 40      The Ontario Courts have also dealt with the issue of res judicata and its relation to an application to pass accounts in Simone Estate v. Cheifetz [2005] O.J. No. 2992. That case involved a defendant executor who resigned from an estate after a conflict arose between him and the beneficiaries. At a hearing to pass the executor's accounts, Flinn J. of the Ontario Court of Justice (General Division) observed that the executor had been motivated by "self-interest and intent to profit": see para. 107 of Simone v. Cheifetz, [1998] O.J. No. 3267. When the beneficiaries later brought a breach of trust and breach of fiduciary duty action against the executor, a motions judge struck portions of the claim on the basis that they were res judicata.

¶ 41      On appeal, the Ontario Court of Appeal overturned the motion judge's ruling on the res judicata issue. MacFarland J.A. for the court held that an application for the passing of accounts is concerned with an entirely different issue than an action for breach of trust. The Justice ruled [at paras. 13-15] that:

¶ 42      In addition to the different issues in the two proceedings, the Ontario Court of Appeal also relied on the fact that the justice dealing with the passing of accounts had not made specific findings as to whether the executor was in breach of fiduciary duty or breach of trust. On this point, the Court held [at paras. 21-22]:

¶ 43      Thus it may be that where an application to pass accounts (or to determine compensation) includes specific allegations of breach of trust or breach of fiduciary duty and the judge hearing the application makes findings of fact on the issue, then the same breach allegations cannot be re-litigated at a subsequent hearing.

¶ 44      These cases suggest that a future action by the Cikanek Estate against Mr. Kuzel for breaches of his fiduciary duty to the estate may be barred by the doctrine of res judicata, but also make it clear that such a determination can only be made if and when such an action is brought.

Conclusion

¶ 45      Paul Kuzel is discharged from his duties as an administrator of the Estate of Frantisek Cikanek; however, this discharge does not constitute a release from any claims against him by the Estate. It cannot be determined at this time whether a possible future action by the Estate against Mr. Kuzel for damages for breach of fiduciary duty would or would not be barred by the doctrine of res judicata.

¶ 46      The parties may speak to me regarding costs, if necessary.

ROSS J.

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