Bankruptcy’s Effect on Costs Awards Against an Estate Trustee

I have commented previously on the use by courts of costs penalties against estate trustees who breach their fiduciary obligations through the misappropriation of funds under their control. However, a recent Ontario case dealt with one problem that may arise in recovering these costs – bankruptcy of the fiduciary.

In Re Baldwin Estate, the Court dealt with a contested passing of accounts of an attorney for property and later executrix of a deceased. The Court found that the fiduciary had engaged in “massive misappropriation”, failure to produce an accounting and failure to make proper production. While a settlement was reached regarding the misappropriation, the Court was asked to deal with the matter of costs. The Court found that the strict test for awarding costs on a higher, substantial indemnity, basis was met as a result of the fiduciary’s misappropriation of the deceased’s assets, a failure to account and her actions in dragging out the passing of accounts hearing. The Court ordered costs in excess of $87,000 to be paid personally by the fiduciary.

Of note, the Court made a declaration that the costs order is a debt which arises out of misappropriation while the attorney/executrix was acting in a fiduciary capacity and, pursuant to s. 178(1)(d) of the Bankruptcy and Insolvency Act (Canada) (the “BIA”), is a debt that is not capable of release by an order of discharge in bankruptcy. That section states as follows:

178(1) An order of discharge does not release the bankrupt from

(d) any debt or liability arising out of fraud, embezzlement misappropriation or defalcation while acting in a fiduciary capacity or, in the province of Quebec, as a trustee or administrator of the property of others.

The application of section s. 178(1)(d) to the costs ordered in this case provides an additional remedy to the objecting parties in that they will be entitled to pursue the costs even if the fiduciary makes an assignment in bankruptcy. What is particularly interesting here though, is that the declaration was made with respect to a costs order. The Court therefore had to find that the imposition of costs constitutes a “debt or liability arising out of” the fiduciary’s misappropriation of assets. The Court has therefore gone beyond applying s. 178(1)(d) solely to misappropriated funds to find that the section extends to costs consequences arising from legal proceedings instituted for the purpose of remedying the misappropriation – a creative use of the BIA.

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