Passing of Accounts
Damages and Section 49 of the Estates Act
For lawyers, limitation periods are more a curse than a blessing. While it provides a client with certainty, the conscientious lawyer is always nervous that a limitation period is approaching or has already passed. The first question a lawyer should ask a prospective client is when a claim or cause of action first arose.
When are beneficiaries of an estate out of time in which to claim damages pursuant to section 49 of the Estates Act ?
A passing of accounts is essentially an estate audit. The executor is required to account for his/her actions to the beneficiaries. An executor will often be required to bring a court application to have the accounts approved. Beneficiaries can object to specific transactions and/or the compensation claimed by the executor. The beneficiaries can also seek damages against the executor on a passing of accounts as a result of misconduct, neglect or default. The issue is whether the two year limitation period set in the new Ontario Limitation Act, which came into force January 1, 2004, applies to a passing of accounts and a claim for damages.
In Ontario, there is generally a two year limitation period in which to bring a claim, subject to some exceptions, including the concept of discoverability (that is, when a claim could have been reasonably discovered by the complaining party). Whether the two year limitation period applies to a passing of accounts is less than clear and the answer seems to depend on the facts. The general sense is that it is up to the executor to pass his accounts from time to time and that a beneficiary need not request that the executor pass his/her accounts every two years in order to preserve the right to object to the accounts or claim damages pursuant to section 49 of the Estates Act. However, once estate accounts have been prepared, it seems reasonable that the beneficiaries have two years in which to make a claim for damages.
However, the one situation where there may be some onus on the beneficiary to demand that an executor pass his or her accounts immediately is when the executor dies without having passed his/her accounts. Section 38 of the Trustee Act generally imposes a two year limitation period for claims against a deceased's estate. No doubt, a beneficiary would become aware in short order that an executor died. Given the two year limitation period imposed by section 38, a beneficiary should demand that the executor's estate pass the executor's accounts in order to preserve the beneficiaries' right to claim damages for misconduct, neglect, or default on the part of the dead executor. The courts have stated in no uncertain terms that there must be some degree of legal finality with death. From a public policy point of view, it would be an anomaly if a damage claim, in the context of a passing of accounts, could survive indefinitely while most other claims against an estate would be statute barred.
When is a Passing of Accounts Final
It is widely assumed, and accepted for that matter, that a formal passing of accounts affords full protection to an estate trustee. The familiar mantra is that those with a financial interest in an estate are not only required to object to the accounts proffered, but must concurrently raise any other issue regarding the overall competency of the estate trustee (succinctly summed by the phrase "you snooze you lose"). However, I recently came across an Ontario Court of Appeal ("C.A.") case that challenges that proposition.
By way of background, section 49(2) of the Estates Act states: "The judge, on passing the accounts of an executor… has jurisdiction to enter into and make full inquiry and accounting of … the whole property that the deceased was possessed of… [including] its administration and disbursement". Section 49(3) authorizes a judge to order the estate trustee to pay damages if the estate trustee occasioned financial loss to the estate through misconduct, neglect, or default. It is worth noting that the language is permissive, not mandatory, seemingly providing a beneficiary with the opportunity to make a later complaint.
In Simone Estate v. Cheifetz, Stephen Cheifetz was a Windsor lawyer who was named as one of three executors of the respective estates of a husband and wife (his clients) who died tragically in a plane crash. Mr. Cheifetz eventually resigned as estate trustee and was ordered to pass his accounts. His compensation was challenged and Mr. Cheifetz was ultimately ordered to repay monies taken as compensation. The successor estate trustee then brought an action against Mr. Cheifetz for damages for breach of fiduciary duty/breach of trust.
Somewhat complicating the matter was the fact that the decision arose out of a rule 20 and rule 21 motion. However, to cut to the chase, the C.A. held that on the earlier passing of accounts the court was concerned with the proper compensation to be paid to Mr. Cheifetz as estate trustee. Conversely, in the action for damages for breach of trust, the court would be concerned with issues of a very different nature. While aspects of Mr. Cheifetz's conduct considered on the passing of accounts might be considered in the action for damages, it would be for a different purpose and different legal considerations would apply.
The C.A. went on to point out the undesirability of litigating the issue of breach of fiduciary duty/breach of trust on a passing of accounts (apparently disregarding the fact that a section 49 claim could be carved out as a trial of an issue). In the end, the action for damages stood and Mr. Cheifetz was permitted to litigate issues pertaining to his alleged breach even if such issues had been raised on the passing of accounts.