Justice Strathy of the Superior Court of Justice ordered that Mr. Zimmerman repay nearly $500,000 in compensation he took as an attorney for property (FN1). The judge also ordered that he personally pay the legal costs of the other side amounting to $284,362.19 (FN2). What happened?
Let me first introduce you to Robert and Signe McMichael. During their lives they collected Canadian art from artists like Tom Thomson and the Group of Seven members. In 1964 they donated their art collection to the province of Ontario and by 1981 the Collection had grown to include more than 2,000 artworks. This Collection is truly a Canadian national treasure. (FN3).
In 2001 Robert and Signe McMichael made mirror wills (FN4). Both husband and wife left everything to each other. Signe’s Will, (like her husband’s) said that if her spouse predeceased her, then when she died, Signe’s assets would be donated to the Collection. Mr. McMichael died in 2003 and his assets were inherited by his wife.
After her husband’s death, Mrs. McMichael signed a power of attorney appointing Mr. Zimmerman as her sole attorney for property. In early 2004 Mr. Zimmerman’s lawyers prepared a trust document appointing Mr. Zimmerman as the trustee. Mr. Zimmerman then transferred virtually all of Mrs. McMichael’s assets including the art collection into the trust so that there was virtually nothing left in her estate.
Under this new trust, Mr. Zimmerman had sole and unfettered discretion to decide which art related organization would receive Signe’s assets years after her death. Effectively, the new trust rendered the Will meaningless. Instead of inheriting everything immediately after Signe’s death, the Collection would get nothing. If the new trust went unchallenged it was totally up to Mr. Zimmerman to decide whether the Collection would receive any of Signe’s assets.
When Mrs. McMichael died in 2007 her niece and husband, the executors under the Will, commenced a legal proceeding. They asked the court to declare that the Power of Attorney and the Trust were void on the ground that Signe lacked capacity. They also wanted Mr. Zimmerman to pass his accounts in a separate proceeding.
The only issue before Justice Strathy was Mr. Zimmerman’s passing of accounts. To pass his accounts Mr. Zimmerman had to show what assets of Signe’s he received and how the money under his control was spent. As an attorney for property it was Mr. Zimmerman’s statutory and common law duty to keep proper accounting records and proof/vouchers to demonstrate that the money spent was for the benefit of Mrs. McMichael. This duty is imposed on trustees because it is a basic fundamental principle of trust law that Mr. Zimmerman, as a trustee, was not entitled to use the trust property for his own personal benefit. If Mr. Zimmerman did use Signe’s assets for his own personal benefit or if he could not account or explain to the court how he spent the money then he would be liable to return it.
When Mr. Zimmerman tried to pass his accounts the fireworks started.
Whatever accounting that was provided was incomplete. Mr. Zimmerman could not or would not provide proper explanations about how he spent the money. The court found that Mr. Zimmerman breached his fiduciary duties and failed to exercise his powers and duties diligently, with honesty and integrity and in good faith, for the incapable person’s benefit. Mr. Zimmerman did not comply with his obligation to keep proper accounts and was not in a position to prove that he administered the trust prudently and honestly. He did not have the accounts ready and was not able to give full information when required.
Mr. Zimmerman infuriated the court because he failed to respond to appropriate objections to his accounts. The judge drew an adverse inference that by failing to respond properly to the questions raised by the Collection and the estate trustees Mr. Zimmerman was guilty of taking the money for himself and would be required to reimburse the estate for those disbursements and expenses (FN5).
This short review of the case law should not be taken as legal advice. Based on my experience in dealing with these cases, they often turn on the specific facts. If you have a legal question relating to something similar, you are best advised to seek out competent legal counsel to determine your best course of action.
Charles B. Wagner is a partner at Wagner Sidlofsky LLP. This Toronto office is a boutique litigation law firm whose practice is focused on estate, commercial and tax litigation.
|FN1. Please see Zimmerman v. McMichael Estate 2010 CarswellOnt 3481, 2010 ONSC 2947, 57 E.T.R. (3d) 101, 103 O.R. (3d) 25 and in particular paragraphs 29 and 88 and 90 for the proposition that a fiduciary may not profit from his role, paragraph 30 for the fiduciary’s duty to account, and paragraphs 35,43 45, 49 and 89.|
FN2. Please see the second Zimmerman decision. The first was decided on May 20, 2010 and cited in FN1. The second was decided on October 4, 2010 and can be found as Zimmerman v. Fenwick 2010 CarswellOnt 8372, 2010 ONSC 5452.
FN3. Robert and Signe McMichael founded the Collection,. Some of the history of the Collection, is described in the judgment of the Court of Appeal in McMichael v. Ontario (1997), 36 O.R. (3d) 163,  O.J. No. 4661 (Ont. C.A.), leave to appeal refused, (S.C.C.).. Their website can be found at http://www.mcmichael.com/
FN4. It is important not to confuse the terms “Mirror Wills” and Mutual Wills. Mirror Wills are identical to one another. Mutual Wills creates an agreement which equity enforces that the wills will not be changed. I refer you to the explanation of Histrop, Estate Planning Precedents which excerpts from Canadian Forms of Wills, 4th ed. BY Terence Sheard and the late Rodney Hall, “ Although a will is by its nature revocable, a testator may, by agreement, create equities in his assets that will be enforceable against those who derive title from him (Dufour v. Pereira (1769), 1 Dick. 419; Stone v. Hoskins,  P. 194; 39 Hals., 3rd ed., p. 851; see also Re Hagger,  2 Ch. 190). The commonest manner in which such equities are created is through the making of joint or mutual wills but the mere fact that two wills are made in identical terms does not of necessity imply any agreement to constitute equitable interests so as to, in effect, make the will of the survivor irrevocable” .
FN5. The finding of an adverse interest is very important with respect to accounting. Under the common law section 32(6) and 42 of the Substitute Decisions Act, 1992, S.O. 1992, c. 30 and under the regulations Accounts and Records of Attorneys and Guardians, O. Reg. 100/96 the attorney for property has a absolute strict duty to in accordance with the regulations, keep accounts of all transactions involving the property of the grantor of the Power of attorney. Justice Strathy, in his judgment, addresses what happens when the attorney fails to keep proper records:
Duty to Account: trustee has an obligation to keep proper accounts. A trustee must keep a complete record of his/her activities and be in a position at all times to prove that he/she administered the trust prudently and honestly. He/she must have the accounts ready and give full information whenever required. (see para 30)
Adverse Inference: An attorney who fails to retain receipts supporting substantial cash withdrawals or expenses charged against the incapable person’s property has not adequately carried out his/her duties and will be held personally liable for the unsubstantiated withdrawals (para 35) It is a basic principle of trust law that a trustee is not entitled to use the trust property for his or her own personal benefit. Trustee has onus to prove disbursements were legitimate. If a trustee cannot account for or explain disbursements or expenses charged against a trust he/she is personally liable to the trust for those disbursements (paragraphs 43 45, 49 and 89).